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Cost of equity with WACC

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Cost of equity with WACC

  • This topic has 1 reply, 2 voices, and was last updated 8 years ago by John Moffat.
Viewing 2 posts - 1 through 2 (of 2 total)
  • Author
    Posts
  • April 4, 2017 at 12:14 pm #380076
    alazees
    Member
    • Topics: 23
    • Replies: 7
    • ☆

    IPho Ltd has irredeemable 4% debt capital in issue with a nominal value of €20m. The current market value of the debt capital is €10 million and the tax rate is 25%. The current market value of equity shares of IPho Ltd is €30 million. The weighted average cost of capital has been determined as 10%.

    The cost of equity of IPho Ltd would therefore be:
    a 11.3%
    b 11.8%
    c 12.3%
    d 12.8%

    Answer – A

    This is the answer given in the illustration. I really do not understand the last two steps of WACC. Could you please explain?

    The cost of debt capital: 4% x (20·0/10·0) x (1 – 0·25) = 6·0%

    WACC:
    10% = [(10/40) x 6·0%] + [(30/40) x Keg%]
    0·75 Keg = 8·5%
    Keg = 11·3%

    Thanks a lot,

    April 4, 2017 at 3:15 pm #380094
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54659
    • ☆☆☆☆☆

    WACC

    10% = (0.24 x 6%) + 0.75 Ke
    10% = 1.5% + 0.75Ke
    10% – 1.5% = 0.75Ke
    8.5% = 0.75Ke

    Ke = 8.5% / 0.75 = 11.3%

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    Posts
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