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Old 04-24-2010, 09:19 PM
vineshlal007 vineshlal007 is offline
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Join Date: Apr 2010
Location: Fiji
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Default Wacc-

The book value of Highland Group's outstanding debt is $60 million.Currently,the debt is trading at 120% of the book value and is priced to yield 12 percent.The 5 million outstanding shares of Highland Group stock are trading at $20 per share.The required return on Highland Group stock is 18 percent.The tax rate is 25 percent.

Calculate the weighted average cost of capital for Highland Group Ltd.
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Old 08-23-2010, 01:54 AM
Helper55 Helper55 is offline
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Join Date: Aug 2010
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Default Re: Wacc-

Wacc= (percentage of equity * cost of equity) + (percentage of debt * cost of debt) * (1-Tax Rate)

We will use market value for the debt since it more closely reflects how the firm raised the debt.

So 60mill*120% = $72mill

Now we must find the debt to asset ratio. debt+equity = 72mill + (5mill shares outstanding * $20 per share) = $172,000,000

So asset ratio = (5mill * 20) / 172,000,000 = 58%

So debt ratio = 1 - 0.58 = 42%

Now to make the WACC calculation easier, we find the aftertax cost of debt.

So Cost of debt (12%) * (1-TC) = 0.12 * (1-0.25) = 0.09 or 9%

Now the WACC calculation is easy.

WACC = (0.58*18) + (0.42*9) = 14.22%

Hope this helps.

Last edited by Helper55; 08-23-2010 at 02:05 AM.
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