Question

Consider the following information for Federated Junkyards of America.

• Debt: $77,000,000 book value outstanding. The debt is trading at 92% of book value. The yield to maturity is 11%.
• Equity: 2,700,000 shares selling at $44 per share. Assume the expected rate of return on Federated’s stock is 20%.
• Taxes: Federated’s marginal tax rate is T_c = 0.21.

Calculate the weighted-average cost of capital (WACC). (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Answer 1

Weighted Average Cost of Capital (WACC) of Federated Junkyards of America is 15.78% calculated as follows:

A B C D E F G 1 Weighted Average Cost of Capital (WACC) is calculated using the following formula 2 WACC= (E/V)*Re+ (D/V)*Rd*(1-T) 3 Where E= Market value of total equity, D= Market value of total debt, 4 V= Total capital (E+D), Re= Cost of equity, Rd= Cost of debt and T= Tax rate Values 2,700,000 $ 44 $ 118,800,000 $ 77,000,000 $ 70,840,000 20% 13 Formula Cell reference Number of shares (N) Given Cuurent price per share (P) Given Therefore, Value of equity (E)= N*P= G7*G8 Book value of Debt Given that market value of debt securities is 92% of book value Therefore, Value of debt (D)= G10*92% Cost of capital (Re) Given Cost of Debt (Rd) YTM Given Tax rate (T) Total capital (V) G9+G12 (E/V)*Re (G9/616)*G13 (D/V)*Rd (G12/616)*G14 (D/V)*Rd*(1-T) G18*(1-615) WACC= (E/V)*Re +(D/V)*Rd*(1-T) Rounded to 14 11% E+D 15 16 17 18 19 20 21 21% $ 189,640,000 0.125 0.041 0.032 0.15775151 15.78%