Question

XYZ Inc. has $10 million in excess cash, a market capitalization of $300 million and a market value of debt of $110 million. Its cost of equity is 12% and its cost of debt is 5%. The corporate tax rate is 31%. Calculate the WACC for XYZ Inc. Express your answer in percent and round to two decimals (do not include the %-symbol in your answer).

Answer 1

Solution :

We know,

$\text{WACC}=\text{equity weightage } \times \text{equity cost} + \text{net debt weightage} \times \text{debt cost} \times (1 -\text{tax rate})$

Net debt = debt market value - excess cash

               = 110 - 10

               = 100 million dollar

$\text{net debt weightage}=\frac{\text{market value of net debt}}{\text{equity market value+ net debt market value}}$

                             $=\frac{100}{300+100}$

                            = 0.25

$\text{equity weightage}=\frac{\text{market value of equity}}{\text{equity market value+ net debt market value}}$

                          $=\frac{300}{300+100}$

                         = 0.75

Therefore, WACC =  0.75 x 12% + 0.25 x 5% x (1 - 31%)

                              =  0.75 x 12% + 0.25 x 5% x (1 - 0.31)

                              =  0.75 x 12% + 0.25 x 5% x 0.69

                              =  9% + 0.862%

                             = 9.862%