Jack\'s Construction Co. has 100,000 bonds outstanding that are selling at par v
ID: 2708058 • Letter: J
Question
Jack's Construction Co. has 100,000 bonds outstanding that are selling at par value. The bonds yield 10.1 percent. The company also has 4.6 million shares of common stock outstanding. The stock has a beta of 1.8 and sells for $50 a share. The U.S. Treasury bill is yielding 5 percent and the market risk premium is 8 percent. Jack's tax rate is 35 percent. What is Jack's weighted average cost of capital?
a) 13.52
b)15.51
c) 11.53
d)7.76
e)17.41
Jack's Construction Co. has 100,000 bonds outstanding that are selling at par value. The bonds yield 10.1 percent. The company also has 4.6 million shares of common stock outstanding. The stock has a beta of 1.8 and sells for $50 a share. The U.S. Treasury bill is yielding 5 percent and the market risk premium is 8 percent. Jack's tax rate is 35 percent. What is Jack's weighted average cost of capital?
a) 13.52
b)15.51
c) 11.53
d)7.76
e)17.41
Explanation / Answer
Cost of equity = 5 + 8*1.80 =19.40
Cost of after tax debt = 10.10*0.65 = 6.565%
Market value of equity = 4.6*50 = $ 230 million
Market value of debt = 100,000*1000 = $ 100 million
Weight of equity = 230/330
Weight of debt =100/330
WACC = 19.40*230/330 + 6.565*100/330
WACC = 15.51%
Answer: b)15.51
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