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Charlotte's Crochet Shoppe has 12,200 shares of common stock outstanding at a price per share of...

Charlotte's Crochet Shoppe has 12,200 shares of common stock outstanding at a price per share of $68 and a rate of return of 11.33 percent. The company also has 370 bonds outstanding, with a par value of $1,000 per bond. The pretax cost of debt is 5.99 percent and the bonds sell for 95.1 percent of par. What is the firm's WACC if the tax rate is 39 percent?

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Answer #1
MV of equity=Price of equity*number of shares outstanding
MV of equity=68*12200
=829600
MV of Bond=Par value*bonds outstanding*%age of par
MV of Bond=1000*370*0.951
=351870
MV of firm = MV of Equity + MV of Bond
=829600+351870
=1181470
After tax cost of debt = cost of debt*(1-tax rate)
After tax cost of debt = 5.99*(1-0.39)
= 3.6539
Weight of equity = MV of Equity/MV of firm
Weight of equity = 829600/1181470
W(E)=0.7022
Weight of debt = MV of Bond/MV of firm
Weight of debt = 351870/1181470
W(D)=0.2978
WACC=after tax cost of debt*W(D)+cost of equity*W(E)
WACC=3.65*0.2978+11.33*0.7022
WACC% = 9.04
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