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Principles of Finance- WACC - iowa43 - 01-12-2015
From the DSST Official Test Preparation Guide: "A trucking company has a debt equity ratio of 0.40, cost of equity of 14%, a cost of debt of 8%, and a tax rate of 35%. What is the company's weighted average cost of capital?"
The answer is 11.19% and the answer explanation says to use the WACC equation to find the answer.
I've been trying to work out this problem but I am not getting the correct answer. Any help that can be provided is appreciated! Thanks in advance.
Principles of Finance- WACC - Yanji - 01-13-2015
First, you have to convert D/E to D/V (0.4/1.4) so that you can get the weights of the firm's capital structure. You then have all the numbers you need to calculate WACC:
WACC = D/V * Rd * (1-T) + E/V * Re
0.286 * 0.08 * (1-0.35) + 0.714 * 0.14 = 0.1149
I get 11.49% using Excel. (this is the right answer, plug it into a WACC calculator if you don't believe me) I'm not sure why the test prep guide says otherwise.
I don't want to come across as rude, as this forum is a place for sharing knowledge, but you've asked a few finance questions over the last day or two which have all been extremely rudimentary. There are many websites on the Internet that describe all of the concepts you asked about (WACC, bond pricing, NPV) in plain language explanations. All it takes is a one word Google search and you will get dozens of relevant hits. In addition, there should be a test-specific thread about this test in the subscriber section which probably contains some study tips or links to useful resources. I say this because asking people to feed you solutions to practice questions, especially when they are so basic, will not help you understand the fundamentals.
Time Value of Money (TVM) Definition | Investopedia
If you need a place to start, this is a page explaining TVM, the foundation of finance. Once you fully understand TVM, it is an easy transition to NPV/IRR, WACC, Beta and everything else you might need to know for the exam.