Question

Problem 13-5 Calculating WACC (LO1) The total book value of WTC's equity is $8 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 13%. The firm's bonds have a face value of $5 million and sell at a price of 110% of face value. The yield to maturity on the bonds is 10%, and the firm's tax rate is 21%. What is the company's WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Answer is complete but not entirely correct. WACC 12.89 %

Answer 1

13-5). Market Value of Debt = Face Value * Selling Price Quote = $5,000,000 * 110% = $5,500,000

Market Value of Equity = Market-to-book ratio * Book Value of Equity = 1.5 * $8,000,000 = $12,000,000

Total Market Value = Market Value of Debt + Market Value of Equity

= $5,500,000 + $12,000,000 = $17,500,000

WACC = [wD * kD * (1 - t)] + [wE * kE]

= [(5,500,000/17,500,000) * 10% * (1 - 0.21)] + [(12,000,000/17,500,000) * 13%]

= 2.48% + 8.91% = 11.40%

13-2). According to the CAPM,

kE = Risk-free Rate + [Beta * Market Risk Premium]

= 4% + [1.2 * 6.5%] = 4% + 7.8% = 11.8%

Total Market Value = Market Value of Debt + Market Value of Equity

= $680,000,000 + $680,000,000 = $1,360,000,000

WACC = [wD * kD * (1 - t)] + [wE * kE]

= [(680,000,000/1,360,000,000) * 7% * (1 - 0.21)] + [(680,000,000/1,360,000,000) * 11.8%]

= 2.765% + 5.90% = 8.665%, or 8.67%