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home / study / business / finance / finance questions and answers / if wild widgets, inc., were an all-equity company, it would have a beta of 1.3. the company ... Your question has been answered Let us know if you got a helpful answer. Rate this answer Question: If Wild Widgets, Inc., were an all-equity company, it would have a beta of 1.3. The company has a... If Wild Widgets, Inc., were an all-equity company, it would have a beta of 1.3. The company has a target debt–equity ratio of .4. The expected return on the market portfolio is 10 percent, and Treasury bills currently yield 3.9 percent. The company has one bond issue outstanding that matures in 20 years and has a coupon rate of 8.8 percent. The bond currently sells for $1,170. The corporate tax rate is 35 percent.

a. What is the company’s cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Cost of debt 7.17 correct %

b. What is the company’s cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Cost of equity 13.04 correct %

c. What is the company’s weighted average cost of capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) WACC 11.00 incorrect %

Only missing WACC the other's are right

Answer 1

Ans.

Cost of Debt

Since company has raised funds from the market at 8.8% coupon which is the cost of borrowing for the company. Now the company will get the tax benefitt on the interest paid for these bonds at the rate of 35%. Therefore while the cost of borrowing ss 8.8% for the company, the effective debt cost will be 8.8%*(1-0.35) which comes out to be 5.72%.

Cost of Equity = Risk Free return + Beta*( Market Rate- Risk Free rate)

Cost of Equity = 3.9% + 1.3*( 10-3.9)

Cost of Equity= 11.83%

WACC = Percentage Equity* Cost of Equity+ Percentage Debt* Cost of Borrowing

Now Debt -Equity Ratio is 0.4

Percentage Debt = (Debt Equity Ratio)/(1+Debt Equity Ratio)

Percentage Debt = 29%

Percentage Equity = (100%- Percentage Debt)

Percentage Equity = 71%

WACC = 71% * 11.83%+ 29%*5.72%

WACC= 10.08%