**Weighted Average Cost of Capital**

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WACC=(w_{d})*k_{d}*(1-t) + w_{ps}k_{ps}+ w_{e}k_{e}

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Cost of Equity using CAPM:

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k_{e}=R_{f}+ Î²*(R_{mkt }- R_{f})

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**Question :**

Tax rate 35%, before tax cost of debt:6.5%, Capital Structure is 50:50 Cost of equity: 10.55%.

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**Ans:**

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WACC= (0.5)*6.5%*(1-0.35) + 0.5*10.55

WACC = 7.4%

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10 yrs AAA rated bond |
8.5% |
Expected market return |
20% |

Beta of market |
1.0 |
Debt/equity ratio |
0.8 |

1 yr market returns |
12% |
Credit spread (BB bond) |
2.17% |

Credit rating of XYZ |
BB |
10 yrs Govt. Bond |
7.33% |

Beta of a stock XYZ |
1.2 |
Tax rate |
40% |

Expected dividend |
$ 5 |
Dividends growth |
10% |

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**Question :Â **Calculate the weighted average cost of capital using above information?

a) 15% Â Â Â b) 17.5%Â c) 20%

**
Ans:** 15%

**
Question :Â **Which of the following will be a fair market price of stock according to Gordon's formula?

a) $25 Â Â Â Â b) $40Â Â Â Â Â c) $30

**
Ans:** $40

**
Question :Â **Which of the following is most likely to be true, if there are no outstanding convertible securities?

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â€¢Â Â Â Â Â EPS <= Diluted EPS

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â€¢Â Â Â Â Â EPS => Diluted EPS

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â€¢Â Â Â Â Â EPS = Diluted EPS

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**Ans:** EPS = Diluted EPS