CFA Practice Question

There are 233 practice questions for this study session.

CFA Practice Question

The market value of XYZ Corp.'s common equity is currently $600 million and the market value of their debt is $400 million. The cost of equity is estimated at 12% and the before-tax cost of debt is estimated at 8%. Suppose that the company wishes to raise an additional $150 million to finance its expansion. However, the company estimates the debt will now cost them 9% (before tax) and the equity will cost 14%. If the company wishes to maintain its existing capital structure, and its tax rate is 40%, what will be the company's new WACC?

A. 10.56%
B. 9.12%
C. 12.0%
Correct Answer: A

Old WACC = 12%(.60) + (1-.4)(8%)(.40) = 9.12%
New WACC = 14%(.60) + (1-.4)(9%)(.40) = 10.56%

Notice how, by raising additional amounts of capital, the component cost of the entire capital amount increases (not just on the marginal capital).

User Contributed Comments 4

User Comment
gulfa99 Companies new WACC is asked considering the old capital and new capital raised. If the existing structure is to be maintained that is weights, i would assume the cost of overall capital to be 9.31, unless the question specifically asks for WACC on the new issue.
johntan1979 Sounds like an acute case of Cfalitis
jonan203 dammit, forgot to adjust the cost of debt for taxes and picked C.
walterli what is the point to calculate old WACC? FFS
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