Jack\'s Construction Co. has 100,000 bonds outstanding that are selling at par v

Question

Jack's Construction Co. has 100,000 bonds outstanding that are selling at par value. The bonds yield 9.3 percent. The company also has 3.8 million shares of common stock outstanding. The stock has a beta of 1.9 and sells for $60 a share. The U.S. Treasury bill is yielding 6 percent and the market risk premium is 9 percent. Jack's tax rate is 35 percent. What is Jack's weighted average cost of capital?

14.21 percent

16.06 percent

17.90 percent

8.95 percent

21.26 percent

Jack's Construction Co. has 100,000 bonds outstanding that are selling at par value. The bonds yield 9.3 percent. The company also has 3.8 million shares of common stock outstanding. The stock has a beta of 1.9 and sells for $60 a share. The U.S. Treasury bill is yielding 6 percent and the market risk premium is 9 percent. Jack's tax rate is 35 percent. What is Jack's weighted average cost of capital?

Explanation / Answer

cost of equity = 6% + 1.9 * 9% = 23.1 %

bond value = 100000 * 1000 = 100 million

equity value = 3.8 million * 60 = 228 million

WACC = 228/328 * 23.1% + 100/328 * (1-0.35)* 9.3%

=17.90 %

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