Dec 2015 Sec B Q4 NPV

hello, please help with this question. thank you. On a market value basis, ABC is financed 70%by equity and 30% by debt. The company has an after-tax cost of 6% and an equity beta of 1.2. The risk -free rate of return is 4% and the equity risk premium is 5%. what is the after-tax WACC of ABC? Thank you

Hi, The WACC should be 8.8% KE = 4%+1.2(5%) = 10% KD = 6% Market Value Equity = 70 Debt = 30 Do the WACC formula and the answer should give you 8.8%.

mpatel: Please don't answer questions in this forum - it is Ask the Tutor, and you are not the tutor (although please do help people in the other F9 forum :-) ) With regard to your original question, the WACC is always calculated after tax (unless you are specifically told otherwise which is very unlikely because the WACC is calculated from cost of equity and cost of debt - cost of equity is not affected by tax, and cost of debt is only less the tax rate if it is irredeemable, if it is redeemable it needs the IRR to be calculated). As far as the tax is concerned you can deal with it in either of the two ways - it makes no difference and gets full marks either way. (Incidentally, if you go to the link "Revision Kit live" from the main F9 page, you will find lectures working through all of the questions from this exam (which was December 2014, not 2015 :-) )

adkini: mpatels answer to your question is correct. However, please start a new thread when it is a different question. mpatels original question was asking something different!!

Thanks for the help. I was supposed to be write 2014 and not 2015. Sorry about answering the other persons question.

You are welcome, and no problem :-)

hello, just attempting the mock exams and these two questions are giving me problems.. please help: QN 1: An investor plans to exchange $1000 into euros now, invest the resulting euros for 12 months, and then exchange the euros back into dollars at the end of the 12 month period. The spot exchange rate is EUR 1.415 per $1 and the euro interest rate is 2% per year. The dollar interest rate is 1.8% per year. Compared to making a dollar investment for 12 months, at what 12- month forward exchange rate will the investor make neither a loss or gain?

The forward rate is calculated using the interest rate parity formula (it is effectively money market hedging). It will be 1.415 x (1.02/1.018) = 1.418 You have not said what your second question is :-)