An analyst gathered the following information about Altrian Corporation: Before-tax cost of new debt: 7% Corporate tax rate: 30% Target debt-to-equity ratio: 0.7 Current stock price: $55 Next year's expected dividend: $4.5 Estimated growth rate: 6% The company's weighted average cost of capital (WACC) is closest to: A. 10.36% B. 8.40% C. 12.44%

The correct answer is A.Cost of Equity = D1/P0 + g = 4.5/55 + 0.06 = 0.1418 D/(D+E) = 0.7/1.7 = 0.4117WACC = wd * rd * (1-t) + wp * rpWACC = 0.4117 * 0.07 * (1-0.3) + (1-0.4117) * 0.1418 = 0.1036 or 10.36%Wherewd = the proportion of debt that a company uses whenever it raises new fundsrd = the before-tax marginal cost of debtt = the company’s marginal tax ratewp = the proportion of preferred stock that the company uses when it raises new fundsrp = the marginal cost of preferred stock

CFA Level 1 Question Of The Week - Corporate Finance (6) - CFA Level 1

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- Matt_AnalystPrep
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  09 Apr 2019 at 11:29 am
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  The correct answer is A.
  
  Cost of Equity = D1/P0 + g = 4.5/55 + 0.06 = 0.1418
  
  D/(D+E) = 0.7/1.7 = 0.4117
  
  WACC = wd * rd * (1-t) + wp * rp
  WACC = 0.4117 * 0.07 * (1-0.3) + (1-0.4117) * 0.1418 = 0.1036 or 10.36%
  
  Where
  
  wd = the proportion of debt that a company uses whenever it raises new funds
  
  rd = the before-tax marginal cost of debt
  
  t = the company’s marginal tax rate
  
  wp = the proportion of preferred stock that the company uses when it raises new funds
  
  rp = the marginal cost of preferred stock
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