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Hi all, I am trying to calculate the current weighted average cost of capital of Droxfol Co. I have been using the WACC formula. I have no problem with getting the market values, and to a point to other parts (cost of debt) but the cost of equity has me confused. Then when I looked at the answers and saw everything laid out similar to the discounting and the final figures used in the WACC formula, I am not sure what is what. Also I thought tax was 30% but the annual after tax interest was 0.7. This has left me very very confused and starting to flap! Any help would be appreciated, not least which figures in the answer relate to which parts of the formula so I can try to work them out. Thanks very much
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Hi there,
For the bond, the 0.7 is the tax shield (100% – 30% = 70%). The interest rate is reduced by this amount because interest is tax deductible. Use an IRR calculation to then get the cost of the bond.
See the attached working.
For cost of shares, the question doesn’t give a beta; this should signal that you need to use the dividend growth model, which works out to
(35 * 1.04)
+ 0.04
450Make sense?
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