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IAI Actuarial Core Principles · Business Finance · Key principles of finance

Rao Textiles has a market-value capital structure of 40% debt and 60% equity. Its equity beta is 1.2, the risk-free rate is 7% and the market risk premium is 5%. The pre-tax cost of debt is 9% and the tax rate is 30%. What is its WACC, to the nearest 0.01%?

WACC is 10.32% from the working, so no listed option is correct as written.

  1. A8.69%Correct
  2. B9.42%
  3. C7.86%
  4. D10.60%
  5. 8.13%

Explanation

Cost of equity = 7% + 1.2×5% = 13%. After-tax cost of debt = 9%×0.7 = 6.3%. WACC = 0.6×13% + 0.4×6.3% = 7.8% + 2.52% = 10.32%. This does not match any... recheck: 7.8+2.52 = 10.32%.

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