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When calculating the wacc, after regearing the asset beta to find the cost of equity, why has the wacc formula been flipped upside down?
WACC in solution is 12.75%
I used the same figures using the wacc formula provided in the exam and got 13.25%
MV equity 18
MV debt 3.6
Ke 14.4%
Kd 4.5%(18/(18+3.6*0.75)*14.4%) + (3.6/18+3.6)*0.045)
12.5% + 0.00075 = 13.25%
Is this acceptable in exam?
Also, just to confirm, if we are given the after-tax cost of debt – we do not multiply the debt by (1-T)?
Thanks
They haven’t flipped the WACC formula – they have used the same as you.
However, you have use the formula wrongly.
What you should have typed is this:
((18/(18 + 3.6)) * 14.4%) + ((3.6/(18 + 3.6) * 4.5%) = 12.75%
I don’t know why you had 0.75 in the first term in your equation.
Also, I have no idea why you then added 0.75%
(Your answer would not be acceptable – the examiners answer is correct).
If we are given the after-tax cost of debt (or if we have had to calculate the cost of debt in the normal way (IRR) then we do not multiply by (1-T).
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