# WACC

Craig Griffith, CFA, is valuing Specialty Steels, Inc. The following information is available: Current market price per share \$18.00 Book value per share (FY 2002) BV0 \$12.00 Consensus EPS estimates: FY 2002 \$2.00 FY 2003 \$2.15 Dividends per share FY 2002 \$1.00 FY 2003 \$1.00 FY 2002 NOPAT per share \$2.50 Specialty Steel’s (equity) Beta 1.10 Expected market rate of return 12.0% Specialty Steel’s after-tax cost of debt 8.0 Risk-free rate 6.0% Specialty Steel’s Debt to Total Assets 50% What is Specialty Steel’s weighted average cost of capital (WACC)? A) 11.07%. B) 12.60%. C) 10.30%. Your answer: A was incorrect. The correct answer was C) 10.30%. f + b(rm − rf) = 6 + 1.10(12 − 6) = 12.60% WACC = Wdrd + WeKe = 10.30% I just don’t understand how they were able to calculate the weights from the data given - obviously the debt/total assets ratiop was used?

12.60 /2 = 6.3 + 4 Wacc 10.3 A= L+ E …if L is 50% then E should be 50% so debt = 8% X 50% (weight) = 4%

thanks cfaboston you know, I was using A + L = E now that is scary. I think I need a break

Bud, This can happen to best of us. I know last 3 days we all are studying like crazy and now our brain is tired. This is why people say not to study a day before exam (which I don’t believe in it).