Question

Market value of the company now is $6 million. They need to raise $3 million. Capital structure is optimal at 50% debt 50% equity New bonds have 8% co coupon sold at par. So know YTM is 8% Common stock is selling at $20 per share rs 12% current dividend of $.80 Tax rate 40%

rd (debt) $ amount a. __________ Weight (decimal form) b.______ x c.______ Cost of debt = d._______ weighted total

Please explain

Answer 1

the market value of company = $6 million

Market value of equity = $3 million

Market value of debt = $3 million

The weight of equity = 50%

the weight of debt = 50%

the after tax cost of debt = 8% *(1 - 0.4) = 4.8%

The cost of equity = 12%

WACC =  (Weight of Equity x Cost of Equity) + (Weight of Debt x After Tax Cost of Debt)

So, the WACC IS = 0.5*0.12 + 0.5*0.048

= 6 + 2.4

=8.4%

a. weight of equity = 50%

b. cost of equity = 12%

c. weight of debt = 50%

d. cost of debt after tax = 4.8

WACC = 8.4%