A company has a total book value of equity of $10 million, and the book value pe

Question

A company has a total book value of equity of $10 million, and the book value per share is $20. However, its stock currently sells at a market price of $30 per share, and its cost of equity capital (rs) is 15 percent. The firm%u2019s bonds have a face (or book) value of $5 million and each bond sells at 110 percent of face value (this implies that each bond is selling at a 10% premium above its $1,000 face value per bond). The yield to maturity (rd) on its bonds is 9 percent and the firm%u2019s tax rate is 40 percent. Find the weighted average cost of capital (WACC) for this company based on its market share weights for debt and equity (rd and rce).

Explanation / Answer

no of share = 10000000/20 = 500000

current market price = 30*500000 = 15000000

cost of equity capital = 15%

market value of debt = 1.1*5000000 = 5500000

cost of debt = 9*.6 = 5.4%

WACC = (15*(15000000/(15000000+5500000)))+(5.4*(5500000/(15000000+5500000))) = 12.42%

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