CFA CFA Level 1 Question of the Week – Corporate Finance (WACC)

Question of the Week – Corporate Finance (WACC)

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    • exam_whiz
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      The market values of a firm’s capital are given below: 

      Total debt: $7 million 
      Outstanding preferred stock: $2 million 
      Outstanding common stock: $12 million 
      Its before-tax cost of debt is 8%, cost of common equity is 12% and cost of preferred stock is 9%. Assuming company’s marginal tax rate is 35%, what is the weighted average cost of capital (WACC) for the firm?
      • 10.40%
      • 10%
      • 9.50%
    • exam_whiz
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      Correct Answer:  C

      Weight of debt in the firm’s capital structure = 7/ (7 + 2 + 12) = 33.3%

      Weight of preferred stock in the firm’s capital structure = 2/ (7 + 2 + 12) = 9.5%

      Weight of common stock in the firm’s capital structure = 12/ (7 + 2 + 12) = 57.1%

      After-tax cost of debt = 8*(1-0.35) = 5.2%

      WACC = (weight of debt*cost of debt) (weight of preferred stock*cost of preferred stock) (weight of equity*cost of equity) = 0.333*0.052 + 0.095*0.09 + 0.571*0.12 = 9.5%

    • shannondaily
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      Woo! I got it right! 🙂 

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