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Hello,
Could you please help me to find the solution of this?
Answer is 7.9%
Blazed co has a $500,000 bank loan that is currently charging 8% interest,$1m 6% irredeemable debentures with a market value of $96ex int and 200,000 equity shares with a current market value of $ 4.50 ex div .Its cost of equity is 12% and the corporation tax rate is 20%.
What is the Wacc?
The bank loan has a market value of $500,000 and has a cost of 8 x 0.8 = 6.4% after tax
The debentures have a market value of 1M x 0.96 = $960,000, and a cost of 6/96 x 0.8 = 5% after tax
The equity has a market value of 200,000 x 4.5 = $900,000 and a cost of 12%
The total market value = 500,000 + 960,000 + 900,000 = 2,360,000
So the WACC, as normal, = ((500,000/2,360,000) x 6.4%) + ((960,000/2,360,000) x 5%) + ((900,000/2,360,000) x 12%) = 7.9%
I do suggest you watch my free lectures on the calculation of the WACC.
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