Johnson Precision Tools has 100 thousand bonds outstanding that are selling at p
ID: 2657948 • Letter: J
Question
Johnson Precision Tools has 100 thousand bonds outstanding that are selling at par value ($1,000). Bonds with similar characteristics are yielding 7.0%. The company also has 10 million shares of common stock outstanding. The stock has a beta of 0.9 and sells for $43 per share. The U.S. Treasury bill is yielding 2.8% and the market risk premium (e.g., Rm-Rf) is 7.3%. The relevant tax rate is 35%. What is the firm's weighted average cost of capital (WACC)? ENTER YOUR ANSWER AS A PERCENTAGE WITH ONE DECIMAL PLACE (e.g., 12.1) AND NOT AS A DECIMAL (e.g., 0.121). ROUND TO THE NEAREST TENTH OF A PERCENT. DO NOT USE THE PERCENT SIGN (%) IN YOUR ANSWER. Your Answer: AnswerExplanation / Answer
After tax cost of debt=7*(1-tax rate)
=7(1-0.35)=4.55%
Total value of bonds=100,000*$1000=$100million
Cost of equity=Risk free rate+Beta*Market risk premium
=2.8+(7.3*0.9)=9.37%
Total value of equity=(10million*$43)=$430million
Total value=($100+$430)=$530million
WACC=Respective costs*Respective weights
=(100/530*4.55)+(430/530*9.37)
which is equal to
=8.5%(Approx).
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