Wallet Drug Company has just recently raised money abroad for the first time in the history of the firm. Prior to the recent equity issue abroad, the firm had a D/V ratio of 40%, an effective tax rate of 30%, a before-tax cost of debt of 9%, and a domestic beta of 1.3. The expected return on the market portfolio was 13% and the risk-free rate was 5%. After the equity issue, Wallet Drug has a D/V ratio of 50%, their after-tax cost of debt has not changed, nor has the effective tax rate, the firm's international beta is 1.0, the expected return on the market portfolio is only 12%, and the risk-free rate is still 5%. What is the change in the firm's WACC after the international equity issue?

Question

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The correct answer is A.The WACC is calculated as follows:WACC = (E/V) * Re + (D/V) * Rd * (1 - T)Where:E/V is the equity-to-value ratioRe is the cost of equityD/V is the debt-to-value ratioRd is the cost of debtT is the tax rateBefore the equity issue, the WACC was:WACC = (0.6) * Re + (0.4) * 0.09 * (1 - 0.3) = 0.096After the equity issue, the WACC is:WACC = (0.5) * Re + (0.5) * 0.09 * (1 - 0.3) = 0.0903The change in the WACC is:ΔWACC = 0.0903 - 0.096 = -0.0057 = -0.57%Therefore, the change in the firm's WACC after the international equity issue is -0.57%.

Wallet Drug Company Has Just Recently Raised Money Abroad for the First