WEIGHTED AVERAGE COST OF CAPITAL

THEORIES
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

D
D
A
B
B
D
D
A
A
A

SOLUTIONS
Problem A:
1.

2.

Problem B:
1.

Problem C:
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1.

2.

3.

Problem D:
1. CAPM

2. WACC:

Problem E:
1.
EPS =
EPS =
EPS = P4

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2.
DPS = EPS X POR

3.

Problem F:
1.

2.

Kn Ke = change
13.36% - 12.625% = 0.735%
3.

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Problem G:
1. Fund from Debt = P 1,500,000 x 30% = P 450,000
Fund from Pref. Stock = P 1,500,000 x 20% = P 300,000
Fund from common stock = P 1,500,000 x50% = P 750,000
2. Answer: P 500,000
The needed fund from common equity (50%) to finance the portion of the capital
expenditure is P 750,000. Since the retained earnings balance is P 500,000 only,
there is a need to accumulate additional fund amounting to P 250,000 through
issuance of new common equity. Hence, the capital expenditure funded by
Retained Earnings is P 500,000 while the portion funded by new issuance is P
250,000.
3. After Tax Cost of Debt =
After Tax Cost of Debt =
After Tax Cost of Debt =
4. Cost of Retained Earnings

5. Cost of New Equity:

6. The WACC composite:

The WACC computed shall be the Composite WACC considering that the available
retained earnings (P500,000) is not enough to fund the capital budget of
P1,500,000. The equity portion of 50% of P1,500,000 is P750,000 clearly showing
that the retained earnings of P500,000 is not enough. Thus, the company should
raise new equity for the P250,000. In this case, the weights for the equity portion will
be split between the new issuance and the retained earnings based on the peso
value of the retained earnings available and the new issuance. However, the
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combined weights shall remain to equal 50% which is the equity portion of the
capital structure.

Problem H:
1. Cost of Retained Earnings

2. Cost of New Equity:

3. Answer is Cost of New Equity (KN)of 12.625%

Capital Budget = 1,800,000
The equity portion of capital budget is P 1,080,000. Computed by multiplying
P1,800,000 by 60% Equity ratio. However, the retained earnings balance
amounted to P 1,000,000 which is not sufficient to finance the said equity portion.
Hence, there is a need to issue new common equity amounting to P 80,000.
So for last peso WACC (Weighted Average Cost of Capital) computation,
the Cost of new issuance (KN) shall be included instead of Cost of Retained
Earnings (KE).

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However, in case the Retained Earnings balance is enough to finance the equity
portion of Capital Budget or Capital Expenditure, the Cost of Retained Earnings
(KE) shall be included rather than Cost of New Issuance (KN).
4. Same answer as number 3. Cost of New Equity (KN)of 12.625%
This is because the equity portion of capital expenditure is P1,200,000
[P2,000,000 x 60%]. The Retained earnings balance of P 1,000,000 is not
sufficient to finance this equity portion. Hence, new equity must be issued to
cover the balance.
The Last Peso WACC is a special computation for the WACC in instances where
the equity portion consists of retained earnings capital and new issuance of
common stock. Instead of the Composite WACC being computed, the Last Peso
WACC only includes the new issuance of common stock for this particular
situation.
5. Composite WACC = 10.1125%
You have to compute for the respective weights of debt, retained earnings and
new equity issuance.
TOTAL CAPEX - P 2,000,000: (40:60 sharing)

*DEBT:(40%)

**EQUITY: (60%)
(RE):
NEW EQUITY:

P 1,200,000
(P 1,000,000)
P 200,000

DEBT:

40% =

RE:

50% =

NEW EQ:

10% =

800,000

After tax cost of debt = 8% = Kd (1-TR)

+[

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In composite WACC, all the sources of funds to finance the Capital Expenditure
(CAPEX) shall be included in the computation. Hence, there is cost of retained
earnings and cost of new issuance.
6. Last Peso WACC = 10.775%

After tax cost of debt = 8% = Kd (1-TR)

In the Last Peso WACC computation, the sources of fund to finance the last peso
expenditure include debt (if firm is levered) and cost of new issuance (if retained
earnings is not sufficient). As a rule, cost of new issuance will be included in WACC
last peso computation unless the retained earnings are enough to fund the equity
portion of CAPEX.
Problem I:
1. Cost of preferred stock new issuance:

The preferred stock is deemed as zero growth stock, thus, the cost of preferred shall be
computed without growth rate. However, the flotation cost percentage shall be incorporated
in the formula. The flotation cost is the additional cost of issuing new securities, whether the
said securities are debt or equity.

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