Question

Problem 18-4 WACC If Wild Widgets, Inc., were an all-equity company, it would have a beta of .95. The company has a target debt-equity ratio of .50. The expected return on the market portfolio is 12 percent and Treasury bills currently yield 3.1 percent. The company has one bond issue outstanding that matures in 25 years, a par value of $1,000, and a coupon rate of 6 percent. The bond currently sells for $1,050. The corporate tax rate is 23 percent. a. What is the company's cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the company's cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What is the company's weighted average cost of capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Cost of debt а. ь. Cost of equity WACC с. %

Answer 1

calculation of cost of debt [kg] this is nothing but yield to maturity (yrr) Criver, one band that maturies in 25 years par value - $1,000 coupon rate = 6% - wurent pico = 1060 YTM = coupon amant + redeemable - value Placchase ) price l life of bond J redeemable value + purchase price - (1000x67) + (1000-1930] - 25 J 1000+ 1050 2 GO-2 1025 - 15.658636585- but there is a tome rate of 23%. afton tome cost of debt -- 5.658536585 (1- 237.) - (4.35707317045-). Dared off to 2 decimales -> 7036).

calculation of cost of equity (kel Li k e a Rp +ß (Rom-RF) delle where Br = risk free rate Rm schurn from market. - 3.1%. + 0.95 (12) - 3:14] = 11,554 round off to a decimals = [11.56%) calculation of WACC . WACC = weake twd xkd = I x 11,555 + 0.5 1150 X 4.35707317045 1:50 => 9.155691056817 round off to e decimaly = [9.16%)