Question 1

'AquaPure', a water desalination utility, has a market value of equity of $10 million and a market value of debt of $5 million. The cost of equity is 12% and the pre-tax cost of debt is 8%. The corporate tax rate is 25%.

Calculate AquaPure's Weighted Average Cost of Capital (WACC).

(Enter your answer as a percentage to one decimal place, e.g., 10.5. Do not include the % sign)

Accepted Answer

Calculate the after-tax cost of debt. Then weight the cost of equity and after-tax cost of debt by their respective market value proportions.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Forgetting to apply the tax shield to the cost of debt, which would result in a WACC of 10.67%.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FM — Financial Management Practice Exam 3

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