Question

Upton Umbrellas has a cost of equity of 11.20 percent, the YTM on the company's bonds is 4.7 percent, and the tax rate is 35 percent. The company's bonds sell for 95.6 percent of par. The debt has a book value of $419,000 and total assets have a book value of $1,035,000. If the market-to-book ratio is 2.55 times, what is the company's WACC? Group of answer choices 9.17% 4.71% 9.55% 8.96% 7.57%

Answer 1

Answer : Calculation of WACC

WACC = (Cost of Equity * Weight of Equity) + (Cost of Debt after tax * Weight of Debt )

Cost of Equity = 11.20%

Cost of Debt after tax = 4.7% * (1 - 0.35)

= 3.055%

Market Value of Debt = 0.956 * Book Value

= 0.956 * 419000

= $ 400,564

Book value of Equity =Book Value Total Assets - Book Value of debt

= 1,035,000 - 419,000

= $ 616,000

Given Market to book ratio = 2.55

Market Value of Equity = Book Value * 2.55

= 616,000 * 2.55

= $1,570,800

Total Market Value = 1,570,800 + 400,564

= 1,971,364

Weight of Equity = 1570800 / 1971364

= 0.7968087

Weight of Debt = 400564 / 1971364

= 0.2031913

WACC = (11.20% * 0.7968087) + (3.055% * 0.2031913)

      = 9.55%