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Dear sir,
I have a qn ( rather silly one I suppose on the WACC calc in this one)I have calculated the market value of equity as 42,614,000$ and market value of debt as 42,298,200$ and here’s my question,
The answer says that the proportion of debt- equity is 50-50, which I understand, what I don’t understand is why is it calculated this way?
cost of capital:
10·6% x 0·5 + 4·9% x 0·5 x 0·8 = 7·3%?I calculated it as,
(10.6% *4261.4/ (4229.82+4261.4) +
4.9% *4229.82/(4229.82+4261.4) )*80% and my WACC says 9.6%So, what did I do wrong?
Thanks.
Sorry, I have figured it out. It was a calculation mistake.
But I have another qn though. Why don’t we multiply the value of debt by (1-t)? why do we multiply the value of debt at the end instead by (1-t), as in this qn,
we dont take it as
10.6% *4261.4/ (4229.82 ( 1-20%) +4261.4)and instead we do this
4229.82/(4229.82+4261.4) )*80%?It doesn’t make sense.
Thanks
The multiplying by 80% (or 0.8) is actually multiplying the 4.9%.
4.9% is the pre-tax cost of debt, and we multiply it by (1-t) to get the after-tax cost to the company.
so we won’t need to multiply denominators and numerators by 0.8 like we used to before?
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