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?
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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