Question

Skolits Corp. has a cost of equity of 11.8 percent and an aftertax cost of debt of 4.44 percent. The company's balance sheet lists long-term debt of $340,000 and equity of $600,000. The company's bonds sell for 104.1 percent of par and market-to-book ratio is 2.80 times. If the company's tax rate is 39 percent, what is the WACC?

Answer 1

10.52%

Step-by-step explanation:

Market value of debt:

= Bond sell for percent of par × long-term debt

= 1.041 × $340,000

= $353,940

Market value of equity:

= Equity × Market-to-book ratio

= $600,000 × 2.80

= $1,680,000

Total market value:

= Market value of debt + Market value of equity

= $353,940 + $1,680,000

= $2,033,940

Weight of debt:

= Market value of debt ÷ Total market value

= $353,940 ÷ $2,033,940

= 0.1740

Weight of equity:

= 1 - Weight of debt

= 1 - 0.1740

= 0.826

WACC:

= (weight of equity × cost of equity) + (weight of debt × cost of debt )

= (0.826 × 0.118) + (0.1740 × 0.0444 )

= 0.097468 + 0.0077256

= 0.1052 or 10.52%