Question

Here is some information about Stokenchurch Inc.: Beta of common stock = 2.1 Treasury bill rate = 4% Market risk premium = 8.4% Yield to maturity on long-term debt = 7% Book value of equity = $530 million Market value of equity = $1,060 million Long-term debt outstanding = $1,060 million Corporate tax rate = 35% What is the company’s WACC?

Answer 1

beta of common stock = 2.1

treasury bill rate= 4%

market risk premium = 8.4%

yield to maturity= 7%

book value of equity= $530 million

market value of equity =$ 1060 million

long term debt outstanding =$ 1060 million

corporate tax rate = 35%

WACC = Ke x Equity/Total capital + Kd x Debt/Total capital

Ke = Rf + β

Therefore,

Ke = 4% + 2.1 x 8.4% = 17.98%

Total capital or Value of firm = Market value of equity + Market value of debt = $1,060 million + $1,060 million = $2,120 million

WACC = 17.98% * (1060/2120) + [7% * (1-35%)] * (1060/2120)

= 0.5 * 17.98% + 0.046 * 0.5

= 0.0899 + 0.0455

WACC of the company = 13.54%