Page 523 - FM Integrated WorkBook STUDENT 2018-19

Answers

Total market value = $9.3m + $0.729m = $10.029m

V e V d
WACC = ––––––– k e + ––––––– ‘k d(1 – T)’
V e + V d V e + V d

WACC = $9.3m/$10.029m × 11.3 + $0.729m/$10.029m × 7.7

WACC = 11.0%

Question 19

The CAPM

The current average market return being paid on risky investments is 15%,
compared wtih 7% on government gilts. X Co has a beta figure of 0.9.

Calculate the required return of an equity investor in X Co.

E(r i) = R f + β i[E(r m) – R f ]

E(r i) = 7 + 0.9 × (15 – 7)

E(r i) = 14.2%

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