Homework Answers
perecentage debt on bond = interest expense / total debt as at the end of year 2011
= 130,000/2,200,000
= 6%
tax rate = tax paid / taxable income
= 330,000/740,000
= 44.6%
cost of debt = perectage on debt of bond ( 1 - tax rate)
= 6(1-0.446)
= 3.32%
cost of equity given = 12% given
WACC = weight of debt x cost of debt + weight of equity x cost of equity
= (debt / market value of company) x cost of debt + (equity / market value of company) x cost of equity
=(2,520,000/6,150,000) x 3.32% + (3,630,000/6,150,000)12%
= 0.41 x 3.32% + 0.59 x 12%
=1.36+7.08
= 8.44%
answer is B 5% < WACC <10%
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