Question

The total book value of WTC's equity is $13 million, and book value per share is $20. The stock has a market-to-book ratio of 1.5, and the cost of equity is 9%. The firm's bonds have a face value of $9 million and sell at a price of 110% of face value. The yield to maturity on the bonds is 6%, and the firm's tax rate is 40%. What is the company's WACC?

Answer 1

No of shares = Total book value/book value/share

No of shares = $13,000,000 / $20

So, no of shares = 650,000 shares

Market value per share = 1.5*20 = $30/share

Total market capitalization = $19,500,000

Market value of bonds = $9000,000*110% = $9,900,000

Total value of WTC = $19500,000 + $9,900,000 = $29,400,000

Cost of equity Ke = 9% weight of equity = 19,500,000/29,400,000 = 0.663

Cost of bonds Kd = 6%   weight of bonds = 9900,000/29,400,000 = 0.337

WACC = [(0.663*9%) + (0.337*6%*0.6)]

WACC =5.967% +1.2132%

WACC = 7.18%