Business Studies, asked by anwerphi, 1 month ago

ABC Ltd. has a gearing ratio of 40%. Its cost of equity is 21% and the cost of debt is 15%. Calculate the company's WACC

Answers

Answered by bishaldasdibru
0

Answer :

The WACC of ABC Ltd. is 12.6%.

Explanation :

To calculate the WACC, we can use the formula:

WACC = (E/V × Ke) + (D/V × Kd) × (1 - Tc)

Where,

E = Market value of the company's equity

D = Market value of the company's debt

V = Total market value of the company (E + D)

Ke = Cost of equity

Kd = Cost of debt

Tc = Corporate tax rate

Given,

Gearing ratio = 40%

Equity proportion = 60%

Debt proportion = 40%

Ke = 21%

Kd = 15%

Tc = 0% (assumed no tax rate)

To find the market values of equity and debt, we need additional information. Assuming the market value of equity is $100 million and the market value of debt is $66.67 million (based on the given gearing ratio of 40%), we can calculate the total market value of the company:

V = E + D

V = $100 million + $66.67 million

V = $166.67 million

Now, we can substitute the values into the WACC formula:

WACC = (E/V × Ke) + (D/V × Kd) × (1 - Tc)

WACC = (0.6 × 0.21) + (0.4 × 0.15) × (1 - 0)

WACC = 0.126 or 12.6%

Therefore, the WACC of ABC Ltd. is 12.6%.

In conclusion, the WACC of ABC Ltd. is 12.6%, which represents the average cost of all the financing sources used by the company, weighted by their respective proportions in the capital structure.

To know more about the concept please go through the links :

https://brainly.in/question/6822469

https://brainly.in/question/13437710

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