Question

The total value of ZBS’s equity is K10 million and the book value per share is K20. The stock sells for a price of K30 per share and the cost of equity is 15 percent. The company’s bonds have a face value of K5 million and sell at a price of 110 percent of face value. The yield to maturity on the bonds is 9 percent and the company’s tax rate is 40 percent. Find the weighted average cost of capital for ZBS.

Answer 1

Calculation of the Market value of equity and debt :-

Market value of equity :-

No. of shares = Equity amount / book value per share = $ 10,000,000 / 20 = 500,000 shares

Market value of equity = No. of shares outstanding * Market value per share = 500,000 * 30 = 15,000,000

Market value of debt :-

Market value of debt = Face value of debt * percentage of selling price over face value

= 5,000,000 * 110%

Market value of debt = 5,500,000

Calculation of the Market weights of debt and equity :-

Particulars	Market values	Weights
Debt	5,500,000	0.2682926829268290
Equity	15,000,000	0.7317073170731710
Total	20,500,000	1

WACC = Cost of debt * weight of debt * ( 1 - tax rate) + Cost of equity * Weight of equity

= 9% * 0.2682926829268290 * ( 1 - 0.40) + 15% * 0.7317073170731710

WACC = 12.4243902439024%

WACC = 12.42%