This preview shows pages 1–2. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
Unformatted text preview: Alternatively, rearranging Equation 16.3, WACC = 1,404/9,200 = 15.2609% d. Rearranging WACC = (1  L)r e + L(1  T)r d , which is Equation 16.1, we have r e = (WACC  L(1  T)r d )/(1  L) = (15.2609%  0.4383(1  .35)12%)/(1  .4383) = 21.08% (a more precise answer is 21.00% if you avoid rounding error) Correct Solution : a. V U = I (1  T)/r = 2,160 (1  0.35)/0.18 = 1,404/0.18 = $7,800 b. V L = V U + T D = $7,800 + 0.35 x 4,000 = $9,200 c. L = D/V L = 4,000/9,200 = 0.43478; and WACC = r(1 TL) = 0.18(1  0.35x0.43478) = 15.2609% Alternatively, rearranging Equation 16.3, WACC = 1,404/9,200 = 15.2609% d. Rearranging WACC = (1  L)r e + L(1  T)r d , which is Equation 16.1, we have r e = (WACC  L(1  T)r d )/(1  L) = (15.2609%  0.43478(1  .35)12%)/(1  .43478) = 21.000% 4000/9200 does NOT equal .4383, it equals .43478. When using the CORRECT weights, the answer will equal 21.000%, not 21.08%....
View Full
Document
 Spring '11
 Bernile

Click to edit the document details