Question

Daves Inc. recently hired you as a consultant to estimate the company’s Weighted Average

Cost of Capital. You have obtained the following information: 1. There is no preferred equity in

the company’s capital structure. 2. The company’s debt is financed through issuing corporate

bond and now the yield to maturity of this bond is 8%. 3. The company’s common stock has an

estimated return of 10%. 4. The tax rate is 40%. 5. The bond price is $900 per unit and there are

1 million units of bond issued. 6. The common stock is priced at $10 per share and there are 10

million stock shares outstanding. What is the firm’s WACC based on market value?

Answer #1

WACC is calculated by using the formula below:

WACC= wd*kd(1-t)+we*ke

where:

**Wd**=percentage of debt in the capital
structure

**We**=percentage of equity in the capital
structure

**Kd**=cost of debt

**Ke**=cost of equity

**t**= tax rate

Cost of debt= 8%

Cost of equity= 10%

Tax rate= 40%

Debt in the capital structure: $900* 1,000,000 = $900,000,000

Equity in the capital structure: $10* 10,000,000= $100,000,000

Total firm capital = $900,000,000 + $100,000,000= $10,000,000.

Weight of debt in the capital structure= $900,000,000/ $10,000,000 =0.90

Weight of equity in the capital structure: $100,000,000/ $10,000,000= 0.10

WACC= 0.90*8%(1-0.40) + 0.10*10%

= 0.90*4.80 + 0.10*10%

= 4.32% + 1% = **5.32%.**

Daves Inc. recently hired you as a consultant to estimate the
company’s WACC. You have obtained the following information. (1)
The firm's bonds have a YTM of 6%. (2) The company’s tax rate is
30%. (3) The risk-free rate is 4%, the market risk premium is 5%,
and the stock’s beta is 1.10. (4) The target capital structure
consists of 30% debt and the balance is common equity. The firm
uses the CAPM to estimate the cost of common stock,...

Daves Inc. recently hired you as a consultant to estimate the
company’s WACC. You have obtained the following information. (1)
The firm's bonds have a YTM of 6%. (2) The company’s tax rate is
30%. (3) The risk-free rate is 4%, the market risk premium is 5%,
and the stock’s beta is 1.10. (4) The target capital structure
consists of 30% debt and the balance is common equity. The firm
uses the CAPM to estimate the cost of common stock,...

Daves Inc. recently hired you as a consultant to estimate the
company’s WACC. You have obtained the following information. (1)
The firm's noncallable bonds mature in 20 years, have an 8.00%
annual coupon, a par value of $1,000, and a market price of
$1,000.00. (2) The company’s tax rate is 25%. (3) The risk-free
rate is 4.50%, the market risk premium is 5.50%, and the stock’s
beta is 1.20. (4) The target capital structure consists of 35% debt
and the...

Daves Inc. recently hired you as a consultant to estimate the
company's WACC. You have obtained the following information. (1)
The firm's noncallable bonds mature in 20 years, have an 8.00%
annual coupon, a par value of $1,000, and a market price of
$1,000.00. (2) The company's tax rate is 25%. (3) The risk-free
rate is 4.50%, the market risk premium is 5.50%, and the stock's
beta is 1.20. (4) The target capital structure consists of 35% debt
and the...

Jeff recently hired you as a consultant to estimate the
company’s WACC. You have obtained the following information. (1)
JB's bonds mature in 25 years, have a 7.5% annual coupon, a par
value of $1,000, and a market price of $936.49. (2) The company’s
tax rate is 40%. (3) The risk-free rate is 6.0%, the market risk
premium is 5.0%, and the stock’s beta is 1.5. (4) The target
capital structure consists of 30% debt and 70% equity. JB uses...

Chelsea’s rentals recently hired you as a consultant to estimate
the company’s WACC. You have obtained the following information.
(1) The firm's noncallable bonds mature in 15 years, have an 7.50%
annual coupon, a par value of $1,000, and a market price of
$1,075.00. (2) The company’s tax rate is 40%. (3) The risk-free
rate is 2.50%, the market risk premium is 6.50%, and the stock’s
beta is 1.30. (4) The target capital structure consists of 35%
debt, 10% preferred...

To estimate the company's WACC, Marshall Inc. recently hired you
as a consultant. You have obtained the following information. (1)
The firm's noncallable bonds mature in 20 years, have an 8.00%
annual coupon, a par value of $1,000, and a market price of
$1,050.00. (2) The company's tax rate is 40%. (3) The risk-free
rate is 4.50%, the market risk premium is 5.50%, and the stock's
beta is 1.20. (4) The target capital structure consists of 35% debt
and the...

To estimate the company's WACC, Marshall Inc. recently hired you
as a consultant. You have obtained the following information. (1)
The firm's noncallable bonds mature in 20 years, have an 8.00%
annual coupon, a par value of $1,000, and a market price of
$1,050.00. (2) The company's tax rate is 40%. (3) The risk-free
rate is 4.50%, the market risk premium is 5.50%, and the stock's
beta is 1.20. (4) The target capital structure consists of 35% debt
and the...

To estimate the company's WACC, B&H inc. recently hired you
as a consultant. You have obtained the following information. (1)
The firm's noncallable bonds mature in 15 years, have a 7.50%
annual coupon, a par value of $1,000, and a market price of
$1,110.00. (2) The company's tax rate is 34%. (3) The risk-free
rate is 3.60%, the market return is 10.50%, and the stock's beta is
1.10. (4) The target capital structure consists of 45% debt and the
balance...

DMH Enterprises recently hired you to estimate their cost of
capital. The firm’s capital structure consists 40% debt, 10%
preferred stock and 50% common stock. The firm has outstanding
bonds with 15 years left to maturity, par value of $1,000 and an
annual coupon of 6%. The bonds currently trade for $695.76. The
firm's preferred stock is currently selling for $63.64 and pays a
dividend of $7. The firm does not plan on issuing new shares of
common equity. It...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 11 minutes ago

asked 21 minutes ago

asked 21 minutes ago

asked 25 minutes ago

asked 29 minutes ago

asked 29 minutes ago

asked 35 minutes ago

asked 46 minutes ago

asked 46 minutes ago

asked 50 minutes ago

asked 1 hour ago

asked 1 hour ago