please include necessary formula, steps of derivation and calculation in your so
ID: 2771794 • Letter: P
Question
please include necessary formula, steps of derivation and calculation in your solution Jake's Sound Systems has 210,000 shares of common stock outstanding at a market price of $36 a share. Its beta is 0.5. Market expected return is 12% and risk-free rate is 5%. Jake's also has 6,000 bonds outstanding with a face value of $1,000 per bond. The bonds carry a 7% coupon, pay interest semi- annually, and mature in 5 years. The bonds are selling at 99% of face value. The company's tax rate is 34%. What is Jake's weighted average cost of capital?
Explanation / Answer
WACC
= Wd×Kd×(1-T)+Ws×Ks
= (6,000×$990)÷[ (6,000×$990)+ (210,000×$36)]×3.62%×2×(1-34%)+(210,000×$36) ÷[ (6,000×$990)+ (210,000×$36)]×[5%+0.5×(12%-5%)]
= 0.44×3.62%×2×(1-34%)+0.56×[5%+0.5×(12%-5%)]
= 25.78%
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