CFA CFA Level 1 CFA Level 1 Question of the Week – Corporate Finance

# CFA Level 1 Question of the Week – Corporate Finance

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• Matt_AnalystPrep
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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’sÂ weighted average cost of capital (WACC) is closest to:

• A. 10.36%
• B. 8.40%
• C. 12.44%
• Matt_AnalystPrep
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• CFA Charterholder
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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 companyâ€™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