IAI Actuarial Core Principles · Business Finance · Key principles of finance
Rohan Foods Ltd is financed by equity with a market value of ₹60 crore and cost of 15%, and by debt with a market value of ₹40 crore and a pre-tax cost of 10%. The tax rate is 25%. What is its WACC?
The WACC is 12%. After-tax cost of debt is 7.5%. Weighting 15% equity by 60% gives 9%, and 7.5% debt by 40% gives 3%, totalling 12%. Ignoring the tax shield on interest would wrongly give 13%.
- A12.5%
- B13.0%Correct
- C10.5%
- D12.0%
- 16.5%
Explanation
After-tax cost of debt = 10% × 0.75 = 7.5%. WACC = 0.6 × 15% + 0.4 × 7.5% = 9% + 3% = 12%. Option 13.0% results from ignoring tax: 9% + 4% = 13%.
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