Question

(NOTE: ENTER YOUR ANSWER IN PERCENT, BUT WITHOUT THE SIGN founded to decimal places, for instance as 7.89, not as 7.89%, or not as 0.0789. Do not four intermediate calculations!) Calipso Beverages has 200,000 shares of stock outstanding, with one share selling for $360 in the stock market. Calipso's shareholders expect a 10% return on their investment. All of the company's debt comes from a $20 million loan it received 5 years ago. The entire loan is to be repaid with a single $20 million payment 10 years from now Meanwhile, Calipso is making annual interest payments equal to $400,000. Assuming Calipso faces a 33% tax rate, calculate Calipso's weighted average cost of capital Answer:

Answer 1

Step 1 )Cost of Debt :

Annual interest rate = interest /Loan amount

                       = 400000 /20000000

                      =.02 or 2%

After tax cost of debt : Before tax cost of debt (1 -tax rate)

                                  2 (1-.33)

                                  2 *.67

                                    1.34%

Step 2 )Calculation of WACC:

	Market value	Market value weights	Cost	Market value weights *cost
Debt	20,000,000	20,000,000/92,000,000 = .21739	1.34%	.21739*1.34 = .29130
Equity	200000*360 = 72,000,000	72,000,000/92,000,000= .78261	10%	.78261*10= 7.8261
Total	92,000,000			8.12 %

Weighted average cost of capital = 8.12