ppt link: https://www.canva.com/design/DAGqkN9ZN50/yijSp9WiWz6R833-RHWozA/edit?utm_content=DAGqkN9ZN50&utm_campaign=designshare&utm_medium=link2&utm_source=sharebutton
Total Assets
10,000,000
EBIT
2,000,000
Tax Rate
WACC = (E/V) x (RE) + (D/V) x [RD x (1-TC)]
35%
D
E
ROE
1,000
9,000
160 2,000- 160 = 1,840 x 65 = 119.60 / 9,000 13.288
3,000
7,000
480 2,000 - 480 = 1,520 x 65 = 988 / 7,000
5,000
5,000
6,000
4,000
leverage debt/Total Assets
interest rate on debt
1
0%
0%
2
10%
16%
3
30%
16%
4
50%
18%
5
60%
21%
900 2,000 - 900 = 1,100 x 65 = 715 / 5,000
1,260 2,000 - 1,260 = 740 x 65 = 481
14.114
14.3
12.025
1
2
3
4
5
Debt
0
1,000,000
3,000,000
5,000,000
6,000,000
Equity
10,000,000
9,000,000
7,000,000
5,000,000
4,000,000
0
160,000
480,000
900,000
1,260,000
2,000,000
2,000,000
2,000,000
2,000,000
2,000,000
0
(160,000)
(480,000)
(900,000)
(1,260,000)
2,000,000
Cost of Debt
EBIT
Less: Cost of Debt
Earnings after Interest, Before Tax
1,840,000
1,520,000
1,100,000
740,000
Less: Tax Payable
(700,000)
(644,000)
(532,000)
(385,000)
(259,000)
Net Income
1,300,000
1,196,000
988,000
715,000
481,000
Divide: Total Shareholders' Equity
10,000,000
9,000,000
7,000,000
5,000,000
4,000,000
13%
13.29%
14.11%
14.30%
12.03%
Cost x Weight
Return on Equity
ASSUME ROE = Cost of Equity
Weight
After Tax Cost of Debt ;
Cost of Equity
Debt
0
0
0%
0%
Equity
10,000,000
100%
13.00%
13.00%
WACC
13%
Cost x Weight
1
Weight
After Tax Cost of Debt ;
Cost of Equity
Debt
1,000,000
10%
10.40%
Equity
9,000,000
90%
12.78%
11.50%
WACC
12.54%
2
1.04%
Weight
After Tax Cost of Debt ;
Cost of Equity
Cost x Weight
Debt
3,000,000
30%
10.40%
3.12%
Equity
7,000,000
70%
12.16%
8.51%
WACC
11.63%
3
Weight
After Tax Cost of Debt ;
Cost of Equity
Cost x Weight
Debt
5,000,000
50%
11.70%
5.85%
Equity
5,000,000
50%
9.75%
4.88%
WACC
10.73%
4
Weight
After Tax Cost of Debt ;
Cost of Equity
Cost x Weight
Debt
6,000,000
60%
13.65%
8.19%
Equity
4,000,000
40%
5.20%
2.08%
WACC
10.27%
5
a firm cannot survive without debt
Equity
COE
Debt
Interest rate on debt
After tax
1
100%
13%
0%
0%
65%
13%
2
90%
12.78%
10%
16%
65%
12.54%
3
70%
12.16%
30%
16%
65%
11.63%
4
50%
9.75%
50%
18%
65%
10.73%
5
40%
5.20%
60%
21%
65%
10.27%
Cost of Equity = Unleveraged Return + (Unleveraged Return - Cost of Debt) x D/E x (1 - Tax Rate)
Unleveraged Returrn on Capital = 13%
WACC
25%