Question

McCann Catching, Inc. has 3.00 million shares of stock outstanding. The stock currently sells for $12.79 per share. The firm’s debt is publicly traded and was recently quoted at 91.00% of face value. It has a total face value of $11.00 million, and it is currently priced to yield 10.00%. The risk free rate is 3.00% and the market risk premium is 8.00%. You’ve estimated that the firm has a beta of 1.34. The corporate tax rate is 37.00%.

The firm is considering a $43.08 million expansion of their production facility. The project has the same risk as the firm overall and will earn $12.00 million per year for 8.00 years.

What is the WACC for McCann Catching, Inc.?

Submit

Answer format: Percentage Round to: 2 decimal places (Example: 9.24%, % sign required. Will accept decimal format rounded to 4 decimal places (ex: 0.0924))

Answer 1

WACC= (weight of equity*cost of equity)+(weight of debt*after tax cost of debt)

Total value of the equity=Outstanding shares*Price of share=(3 million*$12.79)=$38.37 million

Total value of the debt=91%*$11 million=$10.01 million

Weight of equity=(38.37)/(38.37+10.1)=79.3%

Weight of debt=$10.1/(38.37+10.01)=20.7%

Given, Yeild to maturity=10%. This will be before tax cost of debt

After tax cost of debt=Before tax cost debt*(1-tax rate)=10%*(1-37%)=6.3%

Cost equity=risk free rate+(beta*market risk premium)

Cost of equity=(3%+(1.34*8%))=13.72%

WACC=(79.3%*13.72%)+(20.7%*6.3%)=12.18%

WACC=12.18%