Question

The total book value of WTC’s equity is $10 million, and book value per share is $16. The stock has a market-to-book ratio of 1.5, and the cost of equity is 13%. The firm’s bonds have a face value of $6 million and sell at a price of 110% of face value. The yield to maturity on the bonds is 9%, and the firm’s tax rate is 21%.

What is the company’s WACC?

Answer 1

The company's WACC is computed as shown below:

= cost of debt x (1 - tax rate) x weight of debt + cost of equity x weight of equity

Market value of equity is computed as follows:

= Book value of equity x market to book ratio

= $ 10 million x 1.5

= $ 15 million

The market value of debt is computed as follows:

= face value of debt x 110%

= $ 6 million x 110%

= $ 6.60 million

So, the WACC will be as follows:

= 0.09 (1 - 0.21) x $ 6.60 million / ( $ 6.60 million + $ 15 million ) + 0.13 x $ 15 million / ( $ 6.60 million + $ 15 million )

= 0.09 (1 - 0.21) x $ 6.60 million / $ 21.60 million + 0.13 x $ 15 million / $ 21.60 million

= 0.021725 + 0.090277778

= 11.20% Approximately

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