Question

​Wilson's has​ 10,000 shares of common stock outstanding at a market price of​ $35 a share. The firm also has a bond issue outstanding with a total face value of​ $250,000 which is selling for 102 percent of face value. The cost of equity is 11 percent while the preminus tax cost of debt is 8 percent. The firm has a beta of 1.1 and a tax rate of 34 percent. What is​ Wilson's weighted average cost of​ capital?

Answer 1

8.62%

Step-by-step explanation:

Weighted average cost of capital is WACC.

First, find the market values of equity and debt

Market value of equity = 10,000*35 = 350,000

Market values of Debt = 250,000

WACC formula is ;

WACC= wE*rE + wD*rD(1-tax)

whereby,

wE = weight of equity = 350,000/(350,000+250,000) = 0.5833

rE = Cost of equity = 11% or 0.11 as a decimal

wD = weight of debt = 250,000/(350,000+250,000) = 0.4167

rD = pretax cost of debt = 8% or 0.08 as a decimal

tax = 34%

So, WACC = (0.5833*0.11) + [ 0.4167 *0.08(1-0.34) ]

WACC = 0.0642 + 0.02200

= 0.0862

Therefore, weighted average cost of capital (WACC)= 8.62%