You are given the following information for Eastern Valley Inc. Calculate WACC T

Question

You are given the following information for Eastern Valley Inc. Calculate WACC

Tax Rate: 35%
Debt: 4000 Bonds outstanding (coupon rate of 7%, paid semi annually) with current yield to maturity of 8%. The Bonds have a par value of $1,000 and are currently selling at 103% of par value.
Stocks: 90,000 shares outstanding, selling for $57 per share; beta is 1.10
Market: 8% market risk premium and 6% risk-free rate

Hint: You will have to use the market values to find the weights; Not all information this is given will be required to solve the problem.

Explanation / Answer

4000*1.03*1000 = 4,120,000 = outstanding debt 90000*57 = 5,130,000 = outstanding equity 4,120,000/(4,120,000+5,130,000) = 44.54% = percent funded by debt WACC = (44.54%*(8%*(1-0.35)))+(55.46*14%) = 0.023161 + 0.077644 = 10.08% You use market values as said in the question, debt rate has to be reduced by the tax rate, equity rate does not. You then find the weighted average as seen above.

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