Question

Has 8 million shares of stock outstanding selling at $28 per share, and an issue of $24 million in 8.0 percent annual coupon bonds with a maturity of 10 years, selling at 102 percent of par. assume tafkap's weighted average tax rate is 34 percent and its cost of equity is 13.0 percent. what is wacc?

Answer 1

Answer : The company's weighted average cost of capital (WACC) is 12.24%

We have:

No. of outstanding shares = 8,000,000

Market price per share = $28

$Market Value of equity (E) = Market price per share * No. of outstanding shares$

$Market Value of equity (E) = 8,000,000 * 28$

$Market Value of equity (E) = 224,000,000$

Face Value of Debt = $24,000,000

$Market Value of debt (D) = 24,000,000 * 1.02 [/tex]

[tex] Market Value of debt (D) = 24480000$

$Total Value of Capital (V) = Mkt Value of Equity (E) + Mkt Value of Debt (D)$

$Total Value of Capital (V) = 224000000 + 24480000$

Total capital (V) = $248,480,000

$Cost of Equity (R_{e}) = 13%$

$Cost of debt (R_{d}) = 8%$

$Tax Rate = 34%$

WACC = (\frac{E}{V}* R_{e}) + (\frac{D}{V}* R_{d}*(1 - T))

$WACC = (\frac{224000000.00}{248480000.00}* 0.13) + (\frac{24480000.00}{248480000.00}* 0.08*(1 - 0.34))$

$WACC = (0.9* 0.13) + (0.1* 0.08*(1 - 0.34))$

$WACC = 0.1172 + 0.0052$

$WACC = 0.1224$