ACCA FM · Chapter 11 · Question 8 of 11
A company has 10 million ordinary shares with a market price of $3.00 (book value of equity $15m) and a cost of equity of 12%. It also has $10m nominal of bonds quoted at $105 per $100, with an after-tax cost of 5%. What is the weighted average cost of capital using market values (to 2 decimal places)?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) 10.19%
Explanation
Market value of equity = 10m x $3.00 = $30m; market value of debt = $10m x 105/100 = $10.5m; total $40.5m. WACC = (30 x 12% + 10.5 x 5%) / 40.5 = (3.60 + 0.525) / 40.5 = 10.19%. Using book values gives 9.20%, and using the nominal value of the debt gives 10.25%.
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