Question

The simplified balance sheet for the Dutch manufacturer Rensselaer Felt (figures in € thousands) is as follows:

Cash and marketable securities	€	3,500		Short-term debt	€	77,600
Accounts receivable		122,000		Accounts payable		64,000
Inventory		127,000		Current liabilities	€	141,600
Current assets	€	252,500
Property, plant, and equipment		214,000		Long-term debt		210,600
Deferred taxes		47,000
Other assets		87,000		Shareholders' equity		248,300
Total	€	600,500		Total	€	600,500

The debt has just been refinanced at an interest rate of 8.50% (short term) and 10.50% (long term). The expected rate of return on the company's shares is 17.50%. There are 7.66 million shares outstanding, and the shares are trading at €36. The tax rate is 25%.

Calculate this company's weighed-average cost of capital. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Answer 1

Short term debt = 77,600
Long term debt = 210,600
Shareholder's equity = Number of shares * share price
= 7,660,000 * 36 = 275,760 (in thousand)

Total = 77,600 + 210,600 + 275,760 = $563,960

WACC = (Cost of short term debt * (1 - tax rate) * weight of short term debt) + (Cost of long term debt * (1 - tax rate) * weight of long term debt) + (cost of equity * weight of equity)
= (8.50% * (1 - 0.25) * (77,600 / 563,960)) + (10.50% * (1 - 0.25) * (210,600 / 563,960)) + (17.50% * (275,760 / 563,960))
= 0.8772% + 2.9408% + 8.5570%
= 12.37%

WACC = 12.37%