Question

a firm has total financing of N$ 20.06 million made up of N$ 14.46 million worth of equity and N$ 5.6 million worth of debt. the after tax cost of debt is N$ 12.8%.

The next dividend is expected to be 10 cents, the current price is 50 cents ex-dividend and the growth rate is 8%. the firm is planning to raise N$ 5 million in new equity capital at 50 cents with floatation costs of 2cents per share.

Calculate the firms WACC.

Answer 1

WACC cost of capital is 25.08%

CALCULATION:-

A. After tax cost of debt = 12.8%.

B. cost of existing equity capital

the equation for the cost of existing equity capital financing is

Where,

=cost of existing equity capital

= Divident per share at time 1

  =market price per share at time 0

g = expected divident growth rate

Here,

  = 10 cents

  = 50 cents

g = 8%

  = (10/50)+ 8%

    = .2 + .08

    = .28 OR 28%

C. Cost of new equity capital

the equation for Cost of new common stock financing is

Where,

=Cost of new equity capital

= Divident per share at time 1

  =market price per share at time 0

F + U =flotation cost and underprising losses per share

g =expected divident growth rate

Here,

= 10 cents

  = 50 cents

F + U =2 cents

g =8%

= [10/(50-2)] + 8%

= .208 + .08 = 28.83%

D. Total capital

Total capital = debt +existing equity+new equity capital

= 5.6 + 14.46+ 5 = 25.06 million

1. weight of bond= 5.6 / 25.06 = .223

2. weight of existing capital= 14.46 / 25.06 = .577

3. weight of new equity capital= 5 / 25.06 = .2

WACC calculation

Capital item	After-tax cost	Weight	WACC
Debt	12.8%	.223	2.854
Existing Capital	28%	.577	16.156
New Equity Capital	28.83%	.2	5.766
Total		1	25.08

WACC cost of capital is 25.08%