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WACC

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › WACC

  • This topic has 3 replies, 2 voices, and was last updated 5 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • May 8, 2018 at 11:10 am #450567
    dineise18
    Member
    • Topics: 8
    • Replies: 7
    • ☆

    ABC capital structure is as follows

    50c ordinary shares = 12 Million
    8% $1 preference shares = 6 Million
    12.5% loan notes 2006 = 8 Million

    The loan notes are redeemable at nominal value in 2006. The current market prices of the companys securities are as follows

    50c ordinay shares = 250c
    8% $1 preference shares =92c
    12.5% loan notes = $100

    The company is paying corporation tax at the rate of 30%. The cost of the company ordinary equity capital has been estimated at 18% pa.

    What is the company WACC for capital investment appraisal.

    Answer

    K=0.18*(24.2.50)+(8/92)*6*0.92)+0.125*(1-0.30)/ 24* 2.50+6*0.92+8 = 16.29

    Sir, i did not understand this answer. I have tried to calculate WACC separating cost of debt and cost of equity but i got different answer. There is no easy way to understand this exercise?

    Th

    May 8, 2018 at 11:40 am #450571
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 53344
    • ☆☆☆☆☆

    I don’t know where you went wrong, but the answer is as follows:

    Equity: Cost is 18% (from the question); Total market value = 12/0.5 = 24M shares x $2.50 = $60M

    Preference: Cost is 8/92 = 8.70%; total MV = 6M x 0.92 = $5.52M

    Loan notes: They are redeemable at the nominal value, which is also the current market value, and therefore the after-tax cost is 12.5% x (1 – 0.3) = 8.75%. The total MV is $8M

    The total MV of everything is therefore 60 + 5.52 + 8 = $73.52M

    Therefore the WACC = (60/73.52 x 18%) + (5.52/73.52 x 8.7%) + (8/73.52 x 8.75%) = 16.29%

    Have you watched my free lectures on this? The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.

    May 9, 2018 at 6:36 am #450712
    dineise18
    Member
    • Topics: 8
    • Replies: 7
    • ☆

    Yes teacher, i have watched the lesson.

    Thanks.

    May 9, 2018 at 7:21 am #450727
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 53344
    • ☆☆☆☆☆

    You are welcome 🙂

  • Author
    Posts
Viewing 4 posts - 1 through 4 (of 4 total)
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