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4 October, 11:47

Skolits Corp. has a cost of equity of 11.8 percent and an aftertax cost of debt of 4.44 percent. The company's balance sheet lists long-term debt of $340,000 and equity of $600,000. The company's bonds sell for 104.1 percent of par and market-to-book ratio is 2.80 times. If the company's tax rate is 39 percent, what is the WACC?

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  1. 4 October, 12:02
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    10.52%

    Explanation:

    Market value of debt:

    = Bond sell for percent of par * long-term debt

    = 1.041 * $340,000

    = $353,940

    Market value of equity:

    = Equity * Market-to-book ratio

    = $600,000 * 2.80

    = $1,680,000

    Total market value:

    = Market value of debt + Market value of equity

    = $353,940 + $1,680,000

    = $2,033,940

    Weight of debt:

    = Market value of debt : Total market value

    = $353,940 : $2,033,940

    = 0.1740

    Weight of equity:

    = 1 - Weight of debt

    = 1 - 0.1740

    = 0.826

    WACC:

    = (weight of equity * cost of equity) + (weight of debt * cost of debt)

    = (0.826 * 0.118) + (0.1740 * 0.0444)

    = 0.097468 + 0.0077256

    = 0.1052 or 10.52%
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