7. You are the CFO of a major manufacturer, and you are reviewing a report recently completed by a new financial analyst. You note that the weighted average cost of capital (WACC) was
used in part of the analysis,
In the report, the analyst had gathered the following inputs:
Dividend yield
Tax rate
Net profit margin
Risk-free rate
0.03
0.25
0.10
0.02
Forward P/E 15
Trailing P/E 16
Debt/equity ratio
0.75
Total asset turnover 5.25
The analyst used the following formula to estimate the WACC:
WACC = (weight for debt)" (cost of debt) + (weight for equity)*(cost of equity)
0.0775 = (0.75)*(0.08)
(0.25)*(.07)
Identify and correct any potential errors in the analysts WACC calculation