Question

26

Charlotte's Crochet Shoppe has 14,600 shares of common stock outstanding at a price per share of $76 and a rate of return of 11.65 percent. The company also has 290 bonds outstanding, with a par value of $2,000 per bond. The pretax cost of debt is 6.15 percent and the bonds sell for 97.5 percent of par. What is the firm's WACC if the tax rate is 35 percent?

Multiple Choice

• 10.22%

• 8.75%

• 9.79%

• 8.59%

• 9.07%

Answer 1

Number of shares of common stock outstanding	14600
Price per share	76
Total value of equity	14600*76
Total value of equity	1109600
Number of bonds outstanding	290
Par value	2000
Market value (97.5% of par)	.975*2000
Market value (97.5% of par)	1950
Total value of debt	290*1950
Total value of debt	565500
Weighted average cost of capital (WACC) = [(S/S+B)*Rs + (B/S+B)*Rb(1-tc)]
S = equity, B = debt, Rs = Cost of equity, Rb = cost of debt,
tc = corporations tax rate
S	1109600
B	565500
S/(S+B)	0.662408
Rs	0.1165
B/(S+B)	0.337592
Rb	0.0615
tc	0.35
WACC = .6624*.1165 + .3376*.0615*(1-.35)
WACC = .07717 + .02076*(.65)
WACC = .090665
The WACC is
9.07%.