1.Tulloch Manufacturing has a target debt–equity ratio of .62. Its cost of equit

Question

1.Tulloch Manufacturing has a target debt–equity ratio of .62. Its cost of equity is 13.3 percent, and its pretax cost of debt is 8.3 percent. If the tax rate is 38 percent, what is the company’s WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) WACC

2.

Bonaime, Inc., has 7 million shares of common stock outstanding. The current share price is $62.00, and the book value per share is $5.00. The company also has two bond issues outstanding. The first bond issue has a face value of $71 million, a coupon rate of 7 percent, and sells for 93 percent of par. The second issue has a face value of $36 million, a coupon rate of 7.5 percent, and sells for 92 percent of par. The first issue matures in 20 years, the second in 12 years.

a. What are the company’s capital structure weights on a book value basis? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., 32.1616.)
  

b. What are the company’s capital structure weights on a market value basis? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., 32.1616.)
  

c. Which are more relevant, the book or market value weights?
  
(Click to select)Market value weightsBook value weights

Explanation / Answer

Answer 1.

Debt-equity Ratio = 0.62
Weight of Debt = 0.62/1.62 = 0.3827
Weight of Equity = 1.00/1.62 = 0.6173
Cost of Equity = 13.3%
Pre-tax Cost of Debt = 8.3%
tax rate = 38%

WACC = Weight of Debt*Pretax Cost of Debt*(1-tax) + Weight of Equity*Cost of Equity
WACC = 0.3827*8.3%*(1-0.38) + 0.6173*13.3%
WACC = 10.18%

So, WACC of Tulloch Manufacturing is 10.18%

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