What is the company’s WACC? (Do not round intermediate calculations. Enter your

Question

What is the company’s WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Here is some information about Stokenchurch Inc.: Beta of common stock = 1.8 Treasury bill rate = 4% Market risk premium = 8.1% Yield to maturity on long-term debt = 10% Book value of equity = $500 million Market value of equity = $1,000 million Long-term debt outstanding = $1,000 million Corporate tax rate = 35%

What is the company’s WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Explanation / Answer

As per capm cost of equity is Rf + beta×(Rm - Rf)= 4% + 1.8×(8.1%) = 18.58%.

Post tax cost of debt is 10%×0.65 = 6.5%

WACC is

% of equity ×cost of equity + % debt×cost of debt

Market Value WACC is considered appropriate by analysts because an investor would demand market required rate of return on the market value of the capital and not the book value of the capital.

0.5×18.58% + 0.5×6.5% =9.29% + 3.25% = 12.54%

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

---

---

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