Question

The total book value of WTC’s equity is $8 million, and book value per share is $16. The stock has a market-to-book ratio of 1.5, and the cost of equity is 10%. The firm’s bonds have a face value of $4 million and sell at a price of 110% of face value. The yield to maturity on the bonds is 5%, 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.)

Answer 1

Market to book ratio = Market capitalization / Total Book value

Market capitalization = $8,000,000 * 1.50 = $12,000,000

So, The market value of WTC's equity = $12,000,000

Market value of bond's = $4,000,000 * 110% = $4,400,000

Total value = $12,000,000 + $4,400,000 = $16,400,000

Weight of Equity = $12,000,000 / $16,400,000 = 0.731707

Weight of Bonds = $4,400,000 / $16,400,000 = 0.268293

Weighted Average Cost of capital = [0.731707 * 10%] + [0.268293 * 5% * (1 - 0.21)]

Weighted Average Cost of capital = [7.31707% + 1.05975735]

Weighted Average Cost of capital = 8.38%