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The balance sheet of Rafiel Co shows a financing mix of 50% equity shares ($1 nominal value, $3 market value), 20% retained earnings and 30% loan notes (coupon rate 10%). The cost of equity has been calculated as 15%, and the cost of debt is equivalent to the coupon rate. The loan notes are trading at par.
what is the best method of calculating WACC?a) (15% x 62.5 %) + (10% x 37.5%)
b) (15% x 85%) + (10% x 15%)
c) (15% x 83%) +(10% x 17%)
d) (15% x 70%) +(10% x 30%)Could you help me with this question?
Thank youSurely you must have an answer in the same book in which you found the question?!!!
For every $100 total book value on the SOFP, the nominal value of equity is $50 and therefore the market value is $150.
Similarly for every $100 total book value on the SOFP, the nominal value of debt is $30 and the market value is also $30.Therefore the book values are $150 equity and $30 debt, which in %’s are 83% equity and 17% debt. So it is these %’s that are used for the weighting.
(It seems as though you are using an old book – we stopped using the term ‘balance sheet’ many years ago.)
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