1) What was Ashman's adjusted
WACC before selling the bonds?
2) What is its new WACC after selling the bonds and retiring the stock with the proceeds from the sale of the bonds?
Homework Answers
1) WACC = Cost of equity = Rf + beta x MRP = 2.8% + 1.2 x 8.4% = 12.88%
2) Value of debt = 44, Weight of debt, wd = 44 / (2 x 44) = 50% and weight of equity, we = 50%
Cost of equity, re = 2.8% x 1.6 x 8.4% = 16.24%
WACC = wd x rd x (1 - tax) + we x re
= 50% x 7.8% x (1 - 15%) + 50% x 16.24%
= 11.44%
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