XYZ Inc. has $10 million in excess cash, a market capitalization of $300 million and a market value of debt of $110 million. Its cost of equ

XYZ Inc. has $10 million in excess cash, a market capitalization of $300 million and a market value of debt of $110 million. Its cost of equity is 12% and its cost of debt is 5%. The corporate tax rate is 31%. Calculate the WACC for XYZ Inc. Express your answer in percent and round to two decimals (do not include the %-symbol in your answer).

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  1. Solution :

    We know,

    [tex]$\text{WACC}=\text{equity weightage } \times \text{equity cost} + \text{net debt weightage} \times \text{debt cost} \times (1 -\text{tax rate})$[/tex]

    Net debt = debt market value – excess cash

                   = 110 – 10

                   = 100 million dollar

    [tex]$\text{net debt weightage}=\frac{\text{market value of net debt}}{\text{equity market value+ net debt market value}}$[/tex]

                                 [tex]$=\frac{100}{300+100}$[/tex]

                                = 0.25

    [tex]$\text{equity weightage}=\frac{\text{market value of equity}}{\text{equity market value+ net debt market value}}$[/tex]

                              [tex]$=\frac{300}{300+100}$[/tex]

                             = 0.75

    Therefore, WACC =  0.75 x 12% + 0.25 x 5% x (1 – 31%)

                                  =  0.75 x 12% + 0.25 x 5% x (1 – 0.31)

                                  =  0.75 x 12% + 0.25 x 5% x 0.69

                                  =  9% + 0.862%

                                 = 9.862%

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