Jack\'s Construction Co. has 90,000 bonds outstanding that are selling at par va

Question

Jack's Construction Co. has 90,000 bonds outstanding that are selling at par value. The bonds yield 8 percent. The company also has 4 million shares of common stock outstanding. The stock has a beta of 1.1 and sells for $30 a share. The U.S. Treasury bill is yielding 3 percent and the market risk premium is 7 percent. Jack's tax rate is 34 percent. What is Jack's weighted average cost of capital?

8.65 percent 8.38 percent 9.37 percent 5.39 percent 5.10 percent

Can someone solve this for me? I keep getting 7.91 percent.

Explanation / Answer

Cost of debt = 8%*(1-34%) = 5.28%

Cost of equity = 3%+1.1*7% = 10.7%

Debt value = 90,000*1000 = 90 million

Equity value = 4 million *30 = 120 million

Firm value = 90+120 = 210 million

WACC = 90/210*5.28% + 120/210*10.7% = 8.38%

Hope this helped ! Let me know in case of any queries.

Related Questions

Navigate

• Browse (All)
• Browse J
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.