Question

Upton Umbrellas has a cost of equity of 12.3 percent, the YTM on the company's bonds is 6 percent, and the tax rate is 39 percent The company's bonds sell for 103.9 percent of par. The debt has a book value of $429,000 and total assets have a book value of $959,000 If the market-to-book ratio is 2.95 times, what is the company's WACC? ? 10.09% o 558% ? 10.38% 8 35% ? 8.50%

Answer 1

WACC = Ke(E/V) + Kd(D/V)

WACC = 12.3($1,563,500/$2,829,050) + 6($1,265,550/$2,829,050)(1-0.39)

WACC = 6.80 + 1.64

WACC = 8.4%

The correct answer E

$

Market value of equity ($530,000 x 2.95) = 1,563,500

Market value of debt ($429,000 x 2.95) = 1,265,550

Market value of the company 2,829,050

Step-by-step explanation:

In this case, there is need to calculate the market value of the company based on market-to-book ratio. Thus, the market value of the company is the aggregate of book value multiplied by market to book ratio. The book value of equity is the difference between the book value of total assets and book value of debt. WACC is the aggregate of cost of each stock and proportion of the market value of each stock to the market value of the company.