Question 1

Section A

ServicePro Co has a market value of equity of $60 million and a market value of debt of $40 million. The cost of equity is 12% and the pre-tax cost of debt is 6%. The corporation tax rate is 25%.

Calculate the Weighted Average Cost of Capital (WACC) for ServicePro Co. (Enter your answer as a percentage to one decimal place, e.g., 8.5)

Accepted Answer

Use the WACC formula: WACC = [Ve / (Ve + Vd)] * Ke + [Vd / (Ve + Vd)] * Kd * (1 - t).

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Forgetting to multiply the cost of debt by (1-t).

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FM — Financial Management Practice Exam 2

More questions from this exam