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3 November, 19:44

The total book value of WTC's equity is $10 million, and book value per share is $20. The stock has a market-to-book ratio of 1.5, and the cost of equity is 15%. The firm's bonds have a face value of $5 million and sell at a price of 110% of face value. The yield to matu - rity on the bonds is 9%, and the firm's tax rate is 40%. Find the company's WACC. (LO13-1)

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  1. 3 November, 19:54
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    12.88%

    Explanation:

    The formula to compute the WACC is shown below:

    = Weightage of debt * cost of debt * (1 - tax rate) + ((Weightage of common stock) * (cost of common stock)

    where,

    Market Value of Equity is

    = Book Value of Equity * Market to book ratio

    = $10 million * 1.5

    = $15 million.

    Market value of debt = Face Value * Percentage of par value

    = $5 million * 110%

    = $5.50 million

    Now

    Weight of debt = Debt : (Debt + Equity)

    = $5.50 : ($5.50 + $15)

    = 26.83%

    And,

    Weight of equity = Equity : (Debt + Equity)

    = $150 : ($5.50 + $15)

    = 73.17%

    Now the WACC is

    = 26.83% * 9% * (1 - 21%) + (73.17% * 15%)

    = 1.91% + 10.98

    = 12.88%
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