Week 12_WACC Tutorial Questions

Question 1 (total of 15 marks): A company has:

 A target debt-to-equity ratio of 0.25.

 A share price of $20, a dividend of $1 expected in one year, and a growth rate
in dividends of 3% pa.
 5-year bonds which yield 6% pa and pay a coupon of 4%.
 A corporate tax rate of 30%.
 The risk free rate is 4% and the market rate of return is 9% pa.

All rates are effective annual rates. Assume a classical tax system.

Question 1a (4 marks): Calculate the company’s cost of equity.

Question 1b (4 marks): Calculate the company’s pre-tax WACC (sometimes called

the opportunity cost of capital, or the required return on assets, r A ).

Question 1c (4 marks): Calculate the company’s after-tax WACC.

Question 1d (3 marks): Calculate the company’s beta of assets ( β V ) based on its

WACC before tax.
Question 2 (total of 12 marks): A company has:

 2 million shares with a market value of $75 each. The shares’ expected
dividend yield is 5% pa and total required return is 15% pa.
 The company is funded by $100 million worth of 3-year bonds priced at par
which pay a fixed coupon of 8% pa.
 The corporate tax rate is 30%.
 Government bonds pay a fixed coupon rate of 3% pa and yield 2% pa.
 The ASX200 market index has an expected dividend yield of 4% pa and an
expected capital return of 6% pa.

All rates are effective annual rates. Assume a classical tax system.

Question 2a (3 marks): Calculate the company’s debt-to-assets ratio

Question 2b (3 marks): Calculate the company’s pre-tax WACC (sometimes called

the opportunity cost of capital, or the required return on assets, r A ).

Question 2c (3 marks): Calculate the company’s after-tax WACC.

Question 2d (3 marks): Calculate the company’s beta of equity ( β E ) based on its

required return on equity.
Question 3 (total of 15 marks): A company has:

 A target debt-to-assets ratio of 40%.

 The company’s shares have an expected dividend yield of 5% pa and an
expected capital return of 3%.
 The company’s 5-year bonds pay a fixed coupon rate of 3.5% pa and yield of
6% pa.
 The corporate tax rate is 30%.
 Government bonds pay a fixed coupon rate of 2% pa and yield 3% pa.
 The ASX200 market index has an expected dividend yield of 4% pa and an
expected capital return of 5% pa.

All rates are effective annual rates. Assume a classical tax system.

Question 3a (4 marks): Calculate the company’s cost of equity.

Question 3b (3 marks): Calculate the company’s beta of equity ( β E ) based on its

cost of equity found in the previous question.

Question 3c (4 marks): Calculate the company’s pre-tax WACC (sometimes called

the opportunity cost of capital, or the required return on assets, r A ).

Question 3d (4 marks): Calculate the company’s after-tax WACC.

Question 4 (total of 15 marks): A company has:

 A target debt-to-equity ratio of 0.4.

 A beta on equity ( β E ) of 1.2.
 10-year bonds which pay a coupon of 4% and yield 7% pa.
 A corporate tax rate of 30%.
 The risk free rate is 5% and the market rate of return is 10% pa.

All rates are effective annual rates. Assume a classical tax system.

Question 4a (4 marks): Calculate the company’s cost of equity.

Question 4b (4 marks): Calculate the company’s pre-tax WACC (sometimes called

the opportunity cost of capital, or the required return on assets, r A ).

Question 4c (4 marks): Calculate the company’s after-tax WACC.

Question 4d (3 marks): Calculate the company’s beta of assets ( β V ) based on its

WACC before tax.