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Given the following information, what is the firm’s weighted average cost of capital? Market value of...

Given the following information, what is the firm’s weighted average cost of capital? Market value of equity = $30 million; market value of debt = $30 million; cost of equity = 15%. The firm’s bond issue sells for $1075. The coupon rate is 7%, the bonds mature in 20 years, and interest is paid annually. The tax rate is 40%

A) 9.4%

B) 10.6%

C) 11%

D) 15%

E) 22%

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Homework Answers

Answer #1

We will use a BA 2 plus financial calculator to calculate the YTM of the bond-

N(maturity)= 20

PMT(Coupon) = 70

PV(Price) = 1075

FV (face value) = 1000

CMPT I/Y

YTM = 6.3286%

On the basis of market value, total capital is equal to $60 million

Weight of equity=MV of equity/total capital = 0.5

Weight of debt=MV of debt/total capital = 0.5

After tax cost of debt= 6.3286%(1-0.4) = 3.797%

WACC = (0.5*3.797%) + (0.5*15%)

= 9.3985% or 9.4%

Hence, Option A is the answer.

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