FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
10th Edition
ISBN: 9781260013962
Author: BREALEY
Publisher: RENT MCG
Question
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Chapter 13, Problem 8QP

a.

Summary Introduction

To determine: The WACC.

a.

Expert Solution
Check Mark

Answer to Problem 8QP

The WACC is 11.27%.

Explanation of Solution

Determine the WACC

WACC=[((WeightDebt×RateDebt)×(1Tax))+(WeightPreferredStock×RatePreferredStock)+(WeightEquity×RateEquity)]=[((24.30%×9%)×(10%))+(75.70%×12%)]=[0.02187+0.09084]=0.11271or11.27%

Therefore, the WACC is 11.27%.

b.

Summary Introduction

To determine: The cost of equity.

b.

Expert Solution
Check Mark

Answer to Problem 8QP

The cost of equity is 12.60%.

Explanation of Solution

Determine the weight of debt and equity

WeightofDebt=[ValueofDebtMarketValueofDebt]=[$385.7million+$200million$1,585.70million]=0.369364or36.94%

WeightofEquity=[ValueofDebtMarketValueofDebt]=[$1,200million$200million$1,585.70million]=0.630636or63.06%

Therefore, the weight of debt is 36.94% and the weight of equity is 63.06%.

Determine the cost of equity

WACC=[((WeightDebt×RateDebt)×(1Tax))+(WeightEquity×RateEquity)]11.27%=[((36.94%×9%)×(10%))+(63.06%×RateEquity)]RateEquity=[0.0794540.6306]=0.125997or12.60%

Therefore, the cost of equity is 12.60%.

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