Peter’s Audio has 72,000 bonds outstanding that are selling at par value. The bo

Question

Peter’s Audio has 72,000 bonds outstanding that are selling at par value. The bonds have a yield to maturity of 6.95 percent. The company also has 5 million shares of common stock outstanding. The stock has a beta of 1.25 and sells for $28 a share. The U.S. Treasury bill is yielding 3 percent and the market risk premium is 7 percent. Peter's tax rate is 35 percent. What is Peter's weighted average cost of capital?

.

7.48%

9.29%

10.38%

10.91%

11.02%

A.

7.48%

B.

9.29%

C.

10.38%

D.

10.91%

E.

11.02%

Explanation / Answer

WACC=Respective cost*Respective weights

=(72/212*4.5175)+(140/212*11.75)

which is equal to

=9.29%(Approx)(B).

Type Value Cost Bonds (72000*1000)=$72 million 6.95(1-0.35)=4.5175% Common stock (5*28)=$140million [3+(1.25*7))=11.75% Total=$212million

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