$WACC yo

CFA Level II
#1

The following data is given for RBI Corp.: Assets Current Assets 250 Fixed Assets 1,800 Accumulated Depreciation 450 Total Assets 1,600 Liabilities Current Liabilities 185 Long-term Debt 375 Additional Paid in Capital 1,200 Retained Earnings (160) Total Liabilities & Equity 1,600 The yield-to-maturity on RBI debt is 7.5 percent. RBI has an equity beta of 1.1. The expected return on the market for the coming year is 11.5 percent and the risk-free rate is 4.5 percent. RBI’s current capital structure is consistent with its long-term debt-equity mix targets. RBI’s marginal tax rate is 40 percent. What is the dollar weighted average cost of capital ($WACC)? A) $143.76. B) $155.00. C) $163.28. D) $174.53.

#2

A?

#3

A

#4

Not confident one bit. I get a range of answers around C. My closest being $163.2. Wdebt = .265 Wequity = .735 Interested to see how they get the answer.

#5

Niblita75 Wrote: ------------------------------------------------------- > Not confident one bit. I get a range of answers > around C. My closest being $163.2. > > Wdebt = .265 > Wequity = .735 > > Interested to see how they get the answer. Ke= 12.2 Invested Capital = (250-185) + (1800-450) = 1415 or (1600-185) = 1415 Wacc= .101595

#6

Why should current liabilities not be included in calculation of wd? Can anybody please clarify?

#7

Ans. A Niblita Im using your Wdebt and Wequity which I appreantly dont know how to figure out…How did you get the weights? Cost of Equity = CAPM = 4.5+1.1(7) = 12.2% Cost of Debt = 7.5% (1-.4) = 4.5% Wdebt = .265 WEquity = .735 WACC = 12.2%(.735)+4.5%(.265) = 10.16% Invested Capital = NWC + Net PPE NWC = CA - CL = 65 IC = 65 + 1350 = 1415 $WACC = 1415 (10.16%) = 143.76

#8

A. $WACC = WACC * Invested capital Invested Capital = (250-185)+(1800-450)=1415 WACC=0.265*0.6*0.075+0.735*0.122=10.16% 1415*10.16%=143.76 0.122 = 0.045+1.1(0.115-0.045)

#9

show me your wacc. is invested capital the same as total capital? I went with A as it was closest to my answer but I was confused. schweser gave weights as 375/1415 and 1040/1415… I missed that part. is that how you calc them here? I am too lazy to open my LI book.

#10

I was taking the WACC and just multiplying it by 1600. Debt = 375 Equity = (1200-160) Total = 1415 which is the same number you multiplied the WACC by. I forgot to do the NWC + Net PPE

#11

thanks niblita

#12

It was a good question I have forgotten some of this material. I think I need to take another look at Corp Fin.

#13

Thanks for clearing up the weight calc. Perhaps it just wasn’t given here but shouldn’t the weights be calced w/ mkt values or total capital? This was a q in Equity qbank.