Question

At 2018 ABI Construction has a face debt value of 27.14M trading at 86% with a pre-tax weigthed cost of 4.12%. ABI common equity for the year was valued at 94.15M and preferred equity for 11.11M. The Preferred equity rate was calculated to be 7.52%. However, the common equity was to be calculated using CAPM approach, with a 3% risk free rate and a 7% market risk premium rate, assuming a 1.32 Beta. If the tax rate is 38%, What is this firm’s WACC?

Answer 1

The WACC is computed as shown below:

= cost of debt x (1 - tax rate) x weight of debt + cost of preferred stock x weight of preferred stock + cost of equity x weight of equity

cost of equity is computed as follows:

= risk free rate + beta x market risk premium

= 3% + 1.32 x 7%

= 12.24%

Total amount of debt, preferred stock and equity is computed as follows:

= 27.14M x 86% + 11.11M + 94.15M

= 23.3404M + 105.26M

= 128.6004M

So, the WACC is as follows:

= 0.0412 x (1 - 0.38) x 27.14M / 128.6004M + 0.0752 x 11.11M / 128.6004M + 0.1224 x 94.15M / 128.6004M

= 2.5544% x 0.211041334 + 7.52% x 0.086391644 + 12.24% x 0.732112808

= 0.539083984% + 0.649665163% + 8.96106077%

= 10.15%

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