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Noogle Ltd, is a rapidly growing chain of retail stores. A security analyst’s report indicates that...

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Finance

Noogle Ltd, is a rapidly growing chain of retail stores. Asecurity analyst’s report indicates that debt yielding 8% composes25% of Noogle’s overall capital structure. Furthermore, Noogle’sdividends are expected to grow at a rate of 9% per year.

The company should pay $1.50 per share in dividends during thecoming year. The risk free rate is currently equal to 2% and theexpected return on the SP 500 index is 10%. The company’s estimatedbeta is 1.5. Assuming a 40% tax rate, calculate Noogle’s weightedaverage cost of capital.

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3.7 Ratings (557 Votes)

Answer : Noogle Ltd WACC = 11.7%

Solution:

Key Notations :

a) Weight of Debt (Wd)= 25% i.e 0.25

b) Weight of Equity (We)= 1-0.25 = 0.75

c) After Tax Cost of Debt (Kd) = 8%(1-0.40) = 4.8%

d) Cost of Equity (Ke) = Rf + (Rm-Rf)?

                                      = 2 +(10-2)1.5

                                       =14%

    

Calculation of WACC

WACC = We(Ke) + Wd(Kd)

            = 0.75(14) +0.25(4.8)

            = 11.7 %
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Transcribed Image Text

Noogle Ltd, is a rapidly growing chain of retail stores. Asecurity analyst’s report indicates that debt yielding 8% composes25% of Noogle’s overall capital structure. Furthermore, Noogle’sdividends are expected to grow at a rate of 9% per year.The company should pay $1.50 per share in dividends during thecoming year. The risk free rate is currently equal to 2% and theexpected return on the SP 500 index is 10%. The company’s estimatedbeta is 1.5. Assuming a 40% tax rate, calculate Noogle’s weightedaverage cost of capital.

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