CA Inter P6 · Chapter 4 · Question 8 of 10
Kaveri Ltd has equity with a book value of ₹ 50 crore and a market value of ₹ 60 crore, and debentures with a book value of ₹ 50 crore and a market value of ₹ 40 crore. The cost of equity is 14%, the pre-tax cost of debt is 10% and the tax rate is 30%. The WACC using market value weights is:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) 11.20%
Explanation
Post-tax Kd = 10% x 0.70 = 7%. Market weights: equity 60/100 = 0.6 and debt 40/100 = 0.4. WACC = 0.6 x 14% + 0.4 x 7% = 8.4% + 2.8% = 11.20%. Book value weights (0.5 each) give 10.50%, and using pre-tax debt gives 12.40%.
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