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Chapter 17

Question 16

WACC

A company has the following long-term sources of finance:

2m ordinary shares, nominal value $0.75, market price $1.60, cost of equity
15%

0.5m 5% preference shares, nominal value $1, market value $1.25, cost of
preference shares 4%

4% irredeemable debt, nominal value $1m, market value $80, post-tax cost of
debt 5%.

Calculate the current WACC by book (nominal) values and by market values.

WACC by book (nominal) values:

Book value equity = 2m × $0.75 = $1.5m

Book value preference shares = 0.5m × $1 = $0.5m

Book value irredeemable debt = $1m

Total book value = $1.5m + $0.5m + $1.0m = $3.0m

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

WACC = $1.5m/$3m × 15 + $0.5m/$3m × 4 + $1m/$3m × 5

WACC = 9.8%

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