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WACC Calculation Sample Problems

This document contains 3 sample problems for calculating the weighted average cost of capital (WACC) for different companies. Problem 1 asks the reader to calculate the beta of a company given its WACC of 12%, capital structure of 75% debt and 25% equity, cost of debt of 12.5%, and a tax rate of 20%. Problem 2 asks if a company needs to issue external equity given its capital budget, internal equity, net income, and dividend payout ratio. It then calculates the company's WACC using its capital structure, cost of debt, tax rate, stock price, dividend, and dividend growth rate. Problem 3 similarly calculates a company's WACC using information about its capital structure

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Muhammad Faizan
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110 views2 pages

WACC Calculation Sample Problems

This document contains 3 sample problems for calculating the weighted average cost of capital (WACC) for different companies. Problem 1 asks the reader to calculate the beta of a company given its WACC of 12%, capital structure of 75% debt and 25% equity, cost of debt of 12.5%, and a tax rate of 20%. Problem 2 asks if a company needs to issue external equity given its capital budget, internal equity, net income, and dividend payout ratio. It then calculates the company's WACC using its capital structure, cost of debt, tax rate, stock price, dividend, and dividend growth rate. Problem 3 similarly calculates a company's WACC using information about its capital structure

Uploaded by

Muhammad Faizan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd

Sample Problems for WACC

Question 1:
Suppose a company uses only debt and internal equity to …nance its
capital budget and uses CAPM to compute its cost of equity. Company
estimates that its WACC is 12%. The capital structure is 75% debt and
25% internal equity. Before tax cost of debt is 12.5 % and tax rate is
20%. Risk free rate is rRF = 6% and market risk premium (rm rRF ) = 8%:
What is the beta of the company?
Answer:

WACC = wdrd(1 T ) + were


0:12 = 0:75(0:125)(1 0:20) + 0:25re
0:12 = 0:075 + 0:25re
re = 18%
r = 18% = rRF + (rm rRF )
e

18% = 6% + (8%)
= 1:5

Question 2
A company …nances its operations with 50 percent debt and 50
percent equity. Its net income is I = $30 million and it has a dividend
payout ratio of x = 20%. Its capital budget is B = $40 million this year.
The interest rate on company’s debt is r d = 10% and the company’s
tax rate is T = 40%.
The company’s common stock trades at P 0 = $66 per share, and its
current dividend of D0 = $4 per share is expected to grow at a constant
rate of g = 10% a year.
The ‡otation cost of external equity, if issued, is F = 5% of the dollar
amount issued.
a) Will the company have to issue external equity?
weB = 0:50(40M) = 20M
I(1 x) = $30(1 0:2) = 24M

Since I(1 x) > weB =)Internal Equity

1
b) What is the company’s WACC?
D0(1 + g) + g = 4(1 + 0:10) + 0:10 = 16:66%
rinternal =
e
P0 66
WACC = internal
wdrd(1 T ) + were

= 0:50(0:10)(1 0:40) + 0:50(0:166)


= 11:3%

Question 3: A company …nances its operations with 40 percent debt


and 60 percent equity. Its net income is I = $16 million and it has a
dividend payout ratio of x = 25%. Its capital budget is B = $15 million this
year. The annual yield on the company’s debt is r d = 10% and the
company’s tax rate is T = 30%.
The company’s common stock trades at P0 = $55 per share, and its
current dividend of D0 = $5 per share is expected to grow at a constant rate
of g = 10% a year. The ‡otation cost of external equity, if it is issued, is
F = 5% of the dollar amount issued. What is the company’s WACC?

weB = 0:60(15M) = 9M
I(1 x) = $16(1 0:25) = 12M

Since I(1 x) > weB =)Internal Equity


b) What is the company’s WACC?
D0(1 + g) + g = 5(1 + 0:10) + 0:10 = 20%
rinternal =
e
P0 55
WACC = internal
wdrd(1 T ) + were

= 0:40(0:10)(1 0:30) + 0:60(0:20)


= 14:8%

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