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You find this ad hoc WACC attempt and wish to improve it by finding the most...

You find this ad hoc WACC attempt and wish to improve it by finding the most correct WACC from the following information. Taxes are 30%. Stock prices are $60 per share and the firm has 1000 shares outstanding. What is your WACC for this firm?

More Information: (Example) BV=Book Value

Current Liabilities BV=$40,000 Rate: 4% = .33 * 4%

Long term debt BV=$40,000 Rate: 6% = .33 * 6%

Common stock BV=$40,000 Rate: 11% = .33 * 11% AVERAGE = 7% = WACC

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Answer #1

Answer:

WACC doesn't include current liabilities and consider only capital investments from investors.

Note: Since current market value of debt is not shared, we'll assume current market value = book value of long term debt.

Market value - Equity = Curent stock price $60 * Number of share outstanding 1000 = $60,000

Cost of equity RE = 11%

Market/Book Value of long term debt = $40,000

Cost of debt RD = 6%

Total Capital = $100,000

Tax RateT = 30%

WACC = RD * (1 - T) * Debt $40,000 / Total Capital $100,000 + RE * Equity $60,000 / Total Capital $100,000

WACC = 6% * (1-30%) * 0.4 + 11% * 0.6 i.e. 8.28%

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