Tough q (methinks), whichever way I spin the numbers, I can’t get their answer!! Pls incl workings if you get it… Given the following: Item/Current Status of the company/Industry Average Debt:Equity/1.5/1.27 Kd(after tax)/5%/5.9% Ke/12%/12.8% Expected EPS/$5.67/$6.31 Payout ratio/45%/42% Growth rate/6.1%/5.9% Stock price/$43/-- What is the WACC for the optimal capital structure? A 7.46% B 7.75% C 8.76% D 10.75% Note, i can’t find any info re “optimal capital structure” in the vignette. So I am assuming that is to be found in the table given above. The only ting the q does mention is that the company has been acuqiring using both debt and equity other companies rapidly and the analyst believe s the firm capital structure may have drifted from its optimal mix.
I can’t make out anything from the formatting.
I got down with 4 answers, which one would you like? 7.8% 8.66% 8.083701% 7.261234% So the least deviation is ans B?
i got c, by just plugging in the industry average info into MM type II.
I am guessing C as well if we assume every other companies in the industry has optimal structure. The pension question you post is very hard, too. I will try to work out something tonight.
Niblita75 Wrote: ------------------------------------------------------- > I can’t make out anything from the formatting. Hard to put tables in here. But essentially three columns to the table. First column is Item 2nd column is Current Status of the company 3rd column is Industry Average Each column separated by a slash.
dinesh.sundrani Wrote: ------------------------------------------------------- > I got down with 4 answers, which one would you > like? > > 7.8% > 8.66% > 8.083701% > 7.261234% > > So the least deviation is ans B? I got 7.8 using the current structure and 8.08 using the industry av. How did you get the other two?
Schweser ans: A I would have said this was a mistake in Schweser but I can’t get any of the other answers given as choices in this question…what are we missing here?
^^ don’t get any of the above…wongie can you post the calculations used?? and rekooh…u too…please
That’s what I mean, I can’t get any of the answers in the Schweser choices… My calculations are using: a) current structure 1.5/2.5 x 5% plus 1/2.5 x 12% = 7.8% b) industry average 1.27/2.27 x 5% plus 1/2.27 x 12% = 8.08% I’m not going to get too hung up on this q but I thought maybe I’m missing something??? Just can’t seem to get the numbers to fit…
I would go with the calculation b posted above.
comparing one company’s WACC to the industry average WACC generates an “optimal” answer? is this just schweser’s unique wording again?? … i’m thinking there’s better and worse in which case it’s an easy question and others have answered it.
We can rule out C and D due to the fact that these are greater than the current cost of capital. The optimal capital structure minimises WACC. If the capital structure has drifted from its optimal mix, then we can only assume it will be less - which would imply A). But I bet there is some information in the vignette that you have missed that would give us a clue.