Page 172 - Microsoft Word - 00 CIMA F1 Prelims STUDENT 2018.docx
P. 172
Chapter 7
Example 3
A company has:
Current cost of equity of 12%
Ungeared cost of equity of 10%
WACC of 9.25%
Market value of equity of $210 million
Market value of debt of $70 million
Tax rate of 30%.
The company plans to raise $20 million of debt and use these funds to
repurchase shares.
According to Modigliani and Miller’s theory with tax, WACC would move
to:
A 8.62%
B 10.35%
C 9.06%
D 10.87%
164