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QUESTION 41 CGI Co. has a desired capital structure of 10-40-50 (preferred shares, debt, and ordinary...

QUESTION 41

  1. CGI Co. has a desired capital structure of 10-40-50 (preferred shares, debt, and ordinary shares, respectively). The tax rate shifted from 24% to 32%. Other information:

Before-tax cost of preferred stock: 8%

Before-tax cost of common stock: 14%

Before-tax cost debt: 6%

What is the new WACC of CGI Inc.?

a.

9.33%

b.

9.43%

c.

10.2%
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Answer #1

Information provided:

Weight of equity= 50%

Weight of preference shares= 10%

Weight of debt= 40%

Yield of common shares= 14%

Yield of preference shares= 8%

Yield to maturity= 6%

Tax rate= 32%

The weighted average cost of capital is calculated using the below formula:

WACC=Wd*Kd(1-t)+Wps*Kps+We*Ke

where:

Wd= Percentage of debt in the capital structure.

Kd= The before tax cost of debt

Wps= Percentage of preferred stock in the capital structure

Kps=Cost of preferred stock

We=Percentage of equity in the capital structure

Ke= The cost of common equity.

T= Tax rate

WACC= 0.40*6%*(1 – 0.32) + 0.10*8% + 0.50*14%

            = 1.6320% + 0.80% + 7%

            = 9.4320%    9.43%

Hence, the answer is option b.

In case of any query, kindly comment on the solution.

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