Refer to Scenario: Dustvac.What Dustvac's pre-merger WACC?

A) 9.02%
B) 9.50%
C) 9.83%
D) 10.01%

Question

Refer to Scenario: Dustvac.What Dustvac's pre-merger WACC?A) 9.02%B) 9.50%C) 9.83%D) 10.01%

Jakob Morgan · Accepted Answer

Final Answer : C, Explanation :  To calculate Dustvac's pre-merger WACC, we first need to calculate the cost of debt and cost of equity.Cost of Debt:Dustvac's current debt is $5 million at an interest rate of 11%. Since the new debt will also have an interest rate of 8%, we can assume that the cost of debt will also be 8%.Cost of Equity:Using the CAPM model, we can calculate the cost of equity as follows:Re = Rf + β (Rm - Rf)where,Rf = risk-free rate = 6%β = Dustvac's pre-merger beta = 1.36Rm = market risk premium = 4%Re = 6% + 1.36(4%) = 11.44%Now, we can calculate Dustvac's pre-merger WACC as follows:WACC = (E/V)Re + (D/V)Rd(1 - T)where,E = market value of equity = $10 millionV = total market value of the company = $15 million (5 million + 10 million)D = market value of debt = $5 millionRd = cost of debt = 8%T = tax rate = 40%WACC = (10/15)(11.44%) + (5/15)(8%)(1-0.4) = 9.83%Therefore, the answer is (C) 9.83%.

Refer to Scenario: Dustvac.What Dustvac's pre-merger WACC?

A) 9.02%
B) 9.50%
C) 9.83%
D) 10.01%

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