Economy | Probability | Return |

Great | 0.4 | 0.16 |

Average | 0.5 | 0.08 |

Bad | 0.1 | -0.10 |

Bond Calculations | Stock Calculations |

N =? I/Y = 7% (Rd)PV = 0.99 x 30,000,000 = 29,700,000 (D)FV = -30,000,000 | Re = Expected Return Great -> 0.4 x 0.16 = 0.064Average -> 0.5 x 0.08 = 0.04Bad -> 0.1 x -0.10 = -0.1Re = 0.064 + 0.04 + -0.1 Re = 0.094Total Equity = $3 x 15,000,000 Total Equity = $45,000,000(1-t) = (1 - 0.4) = 0.6 |

**Weighted Average Cost of Capital (WACC)**

Formula

[Rd x D/V x (1-T)] + [Re x E/V] |

**= Bond's yield to Maturity (I/Y in Calculator)**

Rd

Rd

**D**= Market Value (Present Value) of Bonds

**(1 - t)**= 1 - tax rate = Interest tax shield deductibility of interest expense

**Re**= Shareholder's return requirement

**V**= Total value of all capital (Debt + Equity)

**Summary of Important WACC**

Rd = 7% or 0.07 D = 29,700,000 (1-t) = 0.6 D / V = 29700 / 74,700 = 0.3976 | Re = 0.094 E = 45,000,000 V = 74,700,000 E/V = 45000 / 74700 = 0.6024 |

**[Rd x D/V x (1-t)] + [Re x E/V]**

**WACC = 0.0733248 -> 7.33%****Interpretation of WACC**

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