Question

Adjusted WACC Ashman Motors is currently an all-equity firm. It has two million shares outstanding, seling for $42 per share. The company has a beta of 0.8, with the current risk-free rate at 27% and the market premium at 9.1% The tax rate is 25% for the company. Ashman has decided to sell $42 million of bonds and retire half its stock. The bonds will have a yield to maturity of 8.7%. The bota of the company will rise to 1.1 with the new debt. What was Ashman's adjusted WACC before selling the bonds? What is its new WACC after selling the bonds and retiring the stock with the proceeds from the sale of the bonds? Hint: The weight of equity before selling the bond is 100% What was Ashman's adjusted WACC before selling the bonds? % (Round to two decimal places.)

Answer 1

Computation of WACC before selling the bond given the weight of equity before the bond is 100% setting B-oir Risk boree Route Rp) = market premium 2.9.), [Rosa Re] = 9.11. No! By Shares outstanding --2 millions RR Return [Required on a Re of B CRM-Re] sur - 2.74, 700,1-) > ke 9.9861 Since the weight of equity is 100%. WACCE ke 100y. 59.987 X 100y. 9.981.

Computection of wack after selling the bond Given tipon selling the Bond, pooleed from such selling is atilised for retiong the equüty Chock]. de Nalue of Equity = 2 millions shares & $ 42 pen share $ 24,000,000 less proceeds from Bood issuing $ 42,000,000 Value of $ 42,000,000 Equity Given - B has been raised to lol 4rm of Bond 28.7"). a ke = Rp + B [Ro-Re] = 2.74 + H (9.1.] = 12.71), ka = 8.74. [i-tourarte] 8.71.61-0-25] = 6.525. n given

arb Stock value kelka cost des collat to Acc Equity 42,000,000 12.414. 6-355%. Bundy 42,000,000 0.5 6.525.4 3.26259 84,00.000 I 9.6175.%. ei ware of the after Selling the Bund 9.61959.