Question

Company JKL Limited has 10 million stocks outstanding. The shares are trading at 60$ per share....

Company JKL Limited has 10 million stocks outstanding. The shares are trading at 60$ per share. It also has 400 bonds outstanding – each valued at 500.000$. The marginal tax-rate is at 30%. For the expected return of the shareholders is about 14% and the interest rate for the bonds is at 8%. What is JKL’s after-tax WACC?

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Answer #1
Formula
WACC = % of Financing in Common Stock X Cost of common Stock + % of Financing in debt X after tax cost of Debt
WACC at tax rate 30%
$ Weight Cost (%) WACC
Common Equity (10,000,000X$60) 60,00,00,000 75.00% 14.00% 0.1050
Debt (400 bonds x $500,000) 20,00,00,000 25.00% 5.60% 0.0140
Total 80,00,00,000 0.1190
JKL's after -tax WACC 11.90%
Note:
Cost of debt = 8% *(1-0.3) = 5.60%
Each bond value considered as $500,000
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