Question

The total book value of WTC’s equity is $14 million, and book value per share is $20. The stock has a market-to-book ratio of 1.5, and the cost of equity is 10%. The firm’s bonds have a face value of $10 million and sell at a price of 110% of face value. The yield to maturity on the bonds is 7%, and the firm’s tax rate is 40%. What is the company’s WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Answer 1

Market to book ratio=MArket value/Book value

Hence MArket value of equity=($20*1.5)=$30 per share

Total number of shares=$14million/$20=700,000 shares

Hence total market value=(700,000*30)=$21,000,000

After tax yield for bonds=7(1-tax rate)

=7(1-0.4)=4.2%

Total market value of bonds=$10million*110%=$11,000,000

Total=$(21,000,000+11,000,000)=$32,000,000

Hence WACC=Respective costs*Respective weights

=(10*21,000,000/32,000,000)+(4.2*11,000,000/32,000,000)

which is equal to

=8.01%(Approx).