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Part 6-WACC FORMULA AND SAMPLE QUESTION-Part 6

The document provides formulas for calculating the cost of equity and the Weighted Average Cost of Capital (WACC) for a company. It includes a sample calculation for BMW's cost of preferred equity and WACC, considering both with and without tax implications. The final WACC is calculated as 9.64% without tax and 7.87% with a tax rate of 40%.

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ilias ahmed
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3 views1 page

Part 6-WACC FORMULA AND SAMPLE QUESTION-Part 6

The document provides formulas for calculating the cost of equity and the Weighted Average Cost of Capital (WACC) for a company. It includes a sample calculation for BMW's cost of preferred equity and WACC, considering both with and without tax implications. The final WACC is calculated as 9.64% without tax and 7.87% with a tax rate of 40%.

Uploaded by

ilias ahmed
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Ki = Annual interest / Principle ( Kd)

Kp = Dividend per share / Market price per share


Ke = Earnings available to common shareholders / Market
price per share

WACC = WiXKi + WpXKp + WeXKe


WACC WITH TAX= WiXKi (1 – t) + WpXKp + WeXKe
Sample Question

1) a) Assume that BMW has preferred stock outstanding with par/face value of $100, dividend
per share of $8.30, and a current market value of $80 per share. What is its cost of preferred
equity?

b) Subsequently, If BMW borrowed 155 Million Long term debt instruments at a rate of 8%,
invested 25 Million in preferred equity and 100 Million in Common stock promising a return
of 12% to its shareholders; what will be its cost of capital (WACC)?

TAX RATE = 40%

1a) Kp = dividend per share / Market price per share = 8.3 / 80 = 0.10375 = 10.375%

1b) Ki = 8% , Kp = 10.375% , Ke = 12%

Total investment = 155 + 25 + 100 = 280 million

Wi = ( 155 / 280)
Wp = ( 25/ 280)
We = ( 100 /280)

WACC without TAX =[ (155/280) * 8 + (25/280) *10.375 + (100/280)*12 ] = 9.64%


WACC WITH TAX =[ (155/280) * 8 * (1 – 0.40) + (25/280) *10.375 + (100/280)*12 ] = 7.87%

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