Question

The total book value of WTC’s equity is $12 million, and book value per share is $24. The stock has a market-to-book ratio of 1.5, and the cost of equity is 14%. The firm’s bonds have a face value of $8 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? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Answer 1

Market value / Book value = 1.5

Market value = 1.5 × 12,000,000

= $18,000,000

Market value of bond = 8,000,000 × 1.10

= $8,800,000

Total investment = market value of equity + market value of debt

= 18,000,000 + 8,800,000

= $26,800,000

Weight of debt= 8,800,000 / 26,800,000 = 0.3284

Weight of equity= 18,000,000 / 26,800,000 = 0.6716

WACC= weight of debt × cost of debt (1-tax) + weight of equity × cost of equity

= 0.3284 × 9% (1-0.21) + 0.6716 × 14%

= 0.3284 × 9% (0.79) + 9.40%

= 0.3284 × 7.11% + 9.40%

= 2.33% + 9.40%

= 11.73%