Question #47

Reading: Reading 21 Free Cash Flow Valuation

PDF File: Reading 21 Free Cash Flow Valuation.pdf

Page: 21

Status: Correct

Correct Answer: A

Part of Context Group: Q47-48 First in Group
Shared Context
- The per-share value Winters should assign to Goliath's equity is closest to: A) $20.24. B) $13.55. C) $16.87.
Question
The weighted average cost of capital (WAC
Answer Choices:
A. 10.5%
B. 10.9%
C. 11.1%
Explanation
The debt-to-equity ratio of 25.0% means that the debt-to-total value is 25.0%/125.0% or 20.0%. The weight of debt is thus 20.0% and the weight of equity is 80.0%. The WACC = [0.20 × (0.075) × (1 – 0.40)] + (0.80 × 0.12) = 10.5%
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