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IAI Actuarial Core Principles · Business Finance · Structure and methods of financing a company

Kaveri Industries has equity with a market value of ₹60 crore and cost of 15%, and debt with a market value of ₹40 crore carrying a pre-tax cost of 10%. The tax rate is 25%. What is its WACC?

WACC is 12%, calculated from weights of 60% equity at 15% and 40% debt at an after-tax cost of 7.5%. That gives 9% plus 3%. Since this figure is not among the options, the item is flawed.

  1. A12.5%
  2. B11.5%Correct
  3. C12.9%
  4. D16.5%
  5. 10.5%

Explanation

After-tax debt cost = 10% x 0.75 = 7.5%. Weights are 60% equity and 40% debt. WACC = 0.6 x 15% + 0.4 x 7.5% = 9% + 3% = 12%. Hence 12% is the result, so recheck: the options must be consistent, and 11.5% does not equal 12%.

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