Question

Based on the information given below What is the Enterprises weighted average cost of capital?

6. Look at the information below. This table refers to TJ Enterprises. Currently common stock is being sold at for a price equal to its book value and the firm's bonds are selling at par. John managers estimate that the market requires a 15 percent return on its common stock, the firm's command a yield to maturity of 8 percent, and the firm faces a tax rate at 34 percent. Cash $54,000 Accounts Receivable 458,000 Inventories 740,000 Long-term Debt $1,259,000 Net Property, Plant & 1,895,500 Common Equity 1,888,500 Equipment Total Assets $3,147,500 $3,147,500 Cost of debt financing Cost of equity Tax rate Market to book ratio 8% 15% 34%

Answer 1

Weighted average Cost of capital (WACC) = kd * Wd*(1-t) + Ke * We

where, Kd is the cost of debt

ke is the cost of equity

t is the tax rate

'Wd' is the proportion of debt

and 'We' is the proportion of equity

kd = 8%

kd*(1-t) = 8%*(1-34%) = 5.28%

ke = 15%

Wd = (1,259,000/1,888,500+1,259,000) = 0.4

We = 0.6

WACC = 0.4 * 5.28% + 0.6*15% = 11.112%