Question

The total book value of WTC's equity is $9 million, and book value per share is $18. The stock has a market-to-book ratio of 1.5, and the cost of equity is 11%. The firm's bonds have a face value of $5 million and sell at a price of 110% of face value. The yield to maturity on the bonds is 6%, and the firm's tax rate is 21%. What is the company's WACC? (Do not round Intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) WACC

Answer 1

Answer:

Book Value of Equity = $9,000,000
Market to Book Ratio = 1.50
1.50 = Market Value of Equity / $9,000,000
Market Value of Equity = $13,500,000

Face Value of Bond = $5,000,000
Market Value of Bond = $5,000,000 * 110%
Market Value of Bond = $5,500,000

Total Value of Firm = $13,500,000 + $5,500,000
Total Value of Firm = $19,000,000

Weight of Equity = $13,500,000 / $19,000,000
Weight of Equity = 0.7105

Weight of Debt = $5,500,000 / $19,000,000
Weight of Debt = 0.2895

Yield to Maturity / Before Tax Cost of Debt = 6%
After Tax Cost of Debt = 6% * (1 – 0.21)
After Tax Cost of Debt = 4.74%

WACC = (Weight of Equity * Cost of Equity) + (Weight of Debt * After Tax Cost of Debt)
WACC = (0.7105 * 11%) + (0.2895 * 4.74%)
WACC = 9.19%