Question 3 (6 marks)

Use the following information for questions 1-6:

Mars Limited has market value of debt of $90 million, market value of equity of $120 million,
and cash of $10 million. The pre-tax cost of debt is 4%, the cost of equity is 8%, and the tax
rate is 30%.
1. Calculate market value of asset.
= +
= 90 + 120 = $210

2. Calculate weight of debt.

=
= 90 10 = $80

= =
+
80 80
= = = 40.00%
80 + 120 200

3. Calculate weight of equity.

= =
+
120 120
= = = 60.00%
80 + 120 200

4. Calculate after-tax cost of debt.

= (1 )
= 4% (1 30%) = 2.80%

5. Calculate pre-tax WACC.

= +
+ +
80 120
= 4% + 8% = 6.40%
80 + 120 80 + 120

6. Calculate after-tax WACC.

= (1 ) +
+ +
80 120
= 4%(1 30%) + 8% = 5.92%
80 + 120 80 + 120

6
Question 3 (6 marks)
Use the following information for questions 1-6:
Pioneer Limited has market value of debt of $60 million. It has book value of equity of $100
million, and 20 million outstanding shares trading at $7 per share. The pre-tax cost of debt is
6%, the cost of equity is 10%, and the tax rate is 30%.

1. Calculate market value of asset.

=
= 20 7 = $140
= +
= 60 + 140 = $200

2. Calculate weight of debt.

=
+
60 60
= = = 30%
60 + 140 200

3. Calculate weight of equity.

=
+
140 140
= = = 70%
60 + 140 200

4. Calculate after-tax cost of debt.

= (1 )
= 6% (1 30%) = 4.20%

5. Calculate pre-tax WACC.

= +
+ +
60 140
= 6% + 10% = 8.80%
60 + 140 60 + 140

6. Calculate after-tax WACC.

= (1 ) +
+ +
60 140
= 6%(1 30%) + 10% = 8.26%
60 + 140 60 + 140

6
Question 3 (6 marks)
Use the following information for questions 1-6:
Pioneer Limited has book value of debt of $200 million, trading at 110% of book value. It has
book value of equity of $150 million, and 20 million outstanding shares trading at $9 per share.
The pre-tax cost of debt is 10%, the cost of equity is 16%, and the tax rate is 30%.
1. Calculate market value of asset.
=
= 200 110% = $220

=
= 20 9 = $180

= +
= 220 + 180 = $400

2. Calculate weight of debt.

=
+
220 220
= = = 55%
220 + 180 400

3. Calculate weight of equity.

=
+
180 180
= = = 45%
220 + 180 400

4. Calculate after-tax cost of debt.

= (1 )
= 10% (1 30%) = 7.00%

5. Calculate pre-tax WACC.

= +
+ +
= 55% 10% + 45% 16% = 12.70%

6. Calculate after-tax WACC.

= (1 ) +
+ +
= 55% 10%(1 30%) + 45% 16% = 11.05%

6
Question 3 (6 marks)
Use the following information for questions 1-6:
Omega Limited has book value of debt of $100 million, trading at 90% of book value. It has
book value of equity of $50 million, and 10 million outstanding shares trading at $11 per share.
The pre-tax cost of debt is 6%, the cost of equity is 10%, and the tax rate is 30%.
1. Calculate market value of asset.
=
= 100 90% = $90

=
= 10 11 = $110

= +
= 90 + 110 = $200

2. Calculate weight of debt.

=
+
90 90
= = = 45%
90 + 110 200

3. Calculate weight of equity.

=
+
110 110
= = = 55%
90 + 110 200

4. Calculate after-tax cost of debt.

= (1 )
= 6% (1 30%) = 4.20%

5. Calculate pre-tax WACC.

= +
+ +
= 45% 6% + 55% 10% = 8.20%

6. Calculate after-tax WACC.

= (1 ) +
+ +
= 45% 6%(1 30%) + 55% 10% = 7.39%

6
Question 3 (6 marks)
Use the following information for questions 1-6:
Sigma limited has market values of debt, market values of preference shares and market values
of common shares of $300 million, $150 million, and $50 million respectively. The pre-tax
cost of debt is 8%, the cost of preference shares is 12%, the cost of common shares is 16%, and
the tax rate is 30%.

1. Calculate weight of debt.

= + +
= 300 + 150 + 50 = $500

=
+ +
300 300
= = = 60%
300 + 150 + 50 500

2. Calculate weight of preference shares.

=
+ +
150 150
= = = 30%
300 + 150 + 50 500

3. Calculate weight of common shares.

=
+ +
50 50
= = = 10%
300 + 150 + 50 500

4. Calculate after-tax cost of debt.

= (1 )
= 8% (1 30%) = 4.80%

5. Calculate pre-tax WACC.

= + +
+ + + + + +
= 60 8% + 30% 12% + 10% 16% = 10%

6. Calculate after-tax WACC.

= (1 ) + +
+ + + + + +
= 60 8% (1 30%) + 30% 12% + 10% 16% = 8.56%

6
Question 3 (6 marks)
Use the following information for questions 1-6:
Sigma limited has market values of debt and market values of preference shares of $360 million
and $60 million respectively. Mars limited has book value of equity of $150 million, and 10
million outstanding shares trading at $18 per share. The pre-tax cost of debt is 8% and the tax
rate is 30%. A preference share has an annual dividend of $2 and a current price of $20.
Common share beta of Sigma limited is 1.10, risk free rate is 4%, and the expected market risk
is 14%.
1. Calculate weight of debt, preference shares and common shares.
=
= 18 10 = $180
= + +
= 360 + 60 + 180 = $600
360
= ++ = 600 = 60%

60
= ++ = 600 = 10%

180
= ++ = 600 = 30%

2. Calculate after-tax cost of debt.

= (1 )
= 8% (1 30%)
= 5.60%

3. Calculate cost of preference shares.

+1
=

2
= = 10%
20

4. Calculate cost of common shares.

= + ( )
= 4% + 1.1(14% 4%) = 15%

5. Calculate pre-tax WACC.

= + +
+ + + + + +

= 60% 8% + 10% 10% + 30% 15% = 10.30%

6. Calculate post-tax WACC.

= (1 ) + +
+ + + + + +

= 60% 5.6% + 10% 10% + 30% 15% = 8.86%