Howdy, Stranger!

It looks like you're new here. If you want to get involved, click one of these buttons!

CFA Events Calendar

View full calendar

Recommended Discussions

See how our partners can help you ace your CFA exams.

CFA Level 1 Question of the Week - Corporate Finance

Matt_AnalystPrepMatt_AnalystPrep MontrealPosts: 45 Associate
edited April 21 in CFA Practice Questions
An analyst gathered the following information about Altrian Corporation:

Before-tax cost of new debt: 7% 
Corporate tax rate: 30% 
Target debt-to-equity ratio: 0.7 
Current stock price: $55 
Next year's expected dividend: $4.5 
Estimated growth rate: 6%

The company's weighted average cost of capital (WACC) is closest to:

CFA Level 1 Question of the Week - Corporate Finance 3 votes

A. 10.36%
66% 2 votes
B. 8.40%
0% 0 votes
C. 12.44%
33% 1 vote
AnalystPrep
CFA Question Bank and Study Notes at https://analystprep.com 
Register today for 120 free practice questions

Comments

  • Matt_AnalystPrepMatt_AnalystPrep MontrealPosts: 45 Associate
    edited April 29
    The correct answer is A.

    Cost of Equity = D1/P0 + g = 4.5/55 + 0.06 = 0.1418

    D/(D+E) = 0.7/1.7 = 0.4117

    WACC = wd * rd * (1-t) + wp * rp
    WACC = 0.4117 * 0.07 * (1-0.3) + (1-0.4117) * 0.1418 = 0.1036 or 10.36%

    Where

    wd = the proportion of debt that a company uses whenever it raises new funds

    rd = the before-tax marginal cost of debt

    t = the company’s marginal tax rate

    wp = the proportion of preferred stock that the company uses when it raises new funds

    rp = the marginal cost of preferred stock

    AnalystPrep
    CFA Question Bank and Study Notes at https://analystprep.com 
    Register today for 120 free practice questions
Sign In or Register to comment.