Question

# 26 Charlotte's Crochet Shoppe has 14,600 shares of common stock outstanding at a price per share...

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%

 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%.