Suppose a firm has 34 million shares of common stock outstanding at a price of $

Question

Suppose a firm has 34 million shares of common stock outstanding at a price of $15.5 per share. The firm also has 100,000 bonds outstanding with a current price of $1171.1. The outstanding bonds have yield to maturity 7.8%. The firm's common stock beta is 2.5 and the corporate tax rate is 38%. The expected market return is 12% and the T-bill rate is 1%. What is the WACC for this firm?

Weight of Equity (3 decimals):  

Weight of Debt (3 decimals):  

Cost of Equity (4 decimals):  

After tax Cost of Debt (4 decimals):  

WACC (4 decimals):

Explanation / Answer

Total value of equity=(34*15.5)=$527 million

Total vaue of debt=(100,000*1171.1)=$117.11million

Total=$644.11million

Hence weight of equity=(527/644.11)=0.818

weight of debt=(117.1/644.11)=0.182

Cost of equity=Risk free rate+Beta*(Market rate-Risk free rate)
=1+2.5*(12-1)=0.285(28.5%)

Cost of debt after tax=Yield(1-tax)

=7.8(1-0.38)=0.0484(Approx)(4.836%)

WACC=Respective costs*Respective weights

=(0.285*0.818)+(0.182*0.0484)=0.2419(Approx)(24.1979%)

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