Question

3. Fisher Corp’s stock price is $20.00 and there are 1 million shares outstanding. The firm’s cost of equity is 12%. The firm also has $15 million in outstanding debt at an interest rate of 8%. The firm faces a 40% tax rate.

a. Estimate the firm’s weighted average cost of capital (WACC).

b. Show and explain how the weighted average cost of capital affects the value of the firm.

Answer 1

1. Weight of equity= (20*1 Million share)/(20+15)= 57.14%

Weight of debt= (15/35)=42.86%

WACC= (cost of equity X weight of equity)+( cost of debt X weight of debt)(1-tax)

= (12*.5714)+(8*.4286)(1-.4)

= (2.05728+6.8568)= 8.914%

2.weighted average cost of capital will be affecting the overall value of the company because it will be used for the overall market capitalisation of the company and weighted average cost of capital should always be trying to take a lower percentage of cost and hence when there would be a lower percentage of weighted average cost of capital it will mean that the overall market capitalisation of the company would be higher because there would be a lower discounting rate in the Play..