Plicher is an emerging market company located in the African country of Llaho that makes construction equipment.In recent years Plichers sales and profits have soared, helped by a series of lucrative contracts to provide equipment for government road-building teams. In her analysis of Plicher, an analyst draws on the following information: The U.S. risk-free rate is 4 percent. The U.S. market-risk premium is 6.5 percent. The global market-risk premium is 9 percent. The Llaho inflation rate is 25 percent. The U.S. inflation rate is 3.5 percent. 10-year Treasury bonds yield 2.5 percent more than T-bills. The Llahoan governments short-term bills pay a yield of 8.3 percent. Plichers marginal tax rate is 30 percent. Plichers equity value is $85.2 million. Plichers revenue estimate for the next 12 months is $146 million. Plichers assets are valued at $279.5 million. Plichers debt rating is A-, and its debt is valued at $45.7 million. On average, 10-year U.S. corporate bonds with rating of A- yield 1.3 percent higher than a 10-year U.S. Treasury bond. On average, 10-year Plicher corporate bonds with a rating of A- yield 5.6 percent more than a 10-year U.S. Treasury bond. Assuming the cost of equity is 25.4 percent and the local risk-free rate is 15 percent, Plichers weighted average cost of capital is closest to: A) 7.74%. B) 10.10%. C) 9.61%. D) 13.86%. Since its 8PM here, I’ll post the answer tomorrow
something is wrong here ! if cost of equity is 25.4 and risk free rate 15 % how can all the options be less than 15 % ? … is the question in nominal terms and the answer in real terms ? Also this is way too much of information for a question like this … has anyone else encountered this question before ?
- because of the tax shield. WACC is after tax 2) because he’s typed out the question wrong. A <> L+E. It’s $148.6m out.
The way you’d work this out is by taking: Cost of equity * Equity/Assets + Cost of Debt * (1 - tax rate) * Debt/Assets. But as Equity+Debt <> Assets, it’s a bit pointless.
So what would we use as the cost of debt? Schweser says to use the local risk-free rate plus the US credit spread. What would be the spread? The US Corp. Bond over US Treasury?
also can we just add the spread, as the inflation rates are different.
i get something close to D
The answer by is C - 9.61% Here’s how Schweser Pro solves it - They decided to Use Cost of equity = 25.4% Cost of debt = Local Risk free rate + 10-year U.S. corporate bonds Spread = 15+1.3 = 16.3 % Now here’s where it confused me as well WACC = (Debt/asset)*16.3*(1-.3) + (Equity/asset)*25.4 = (45.7/279.5)*16.3*0.7 + (85.2/279.5)*25.4 = 9.61% I too am confused about Debt+equity<> Asset. Can any one explain it please! Also i copy pasted the question from schpro, so am sure i did not miss anything. It was a vignette and this was the only relevant part to this specific question
Question ID please.
Solve by MV of debt
Christmas: Am travelling till tom. Will Post the question ID as soon as i reach home.
schweser pro qn number 50015. I’m tired of thinking about it. Will just leave this question if it appears on the exam