Question

The total book value of WTC’s equity is $10 million, and book value per share is $16. The stock has a market-to-book ratio of 1.5, and the cost of equity is 13%. The firm’s bonds have a face value of $6 million and sell at a price of 110% of face value. The yield to maturity on the bonds is 9%, and the firm’s tax rate is 21%. What is the company’s WACC?

Answer 1

The WACC for the company is approximately 13.90%.

Step-by-step explanation:

The Weighted Average Cost of Capital (WACC) is the average cost of financing for a company that is weighted according to the proportion of each source of financing. To calculate the WACC, we need to know the cost of equity and the cost of debt. In this case, the cost of equity can be calculated using the market-to-book ratio and the cost of debt can be calculated using the yield to maturity on the bonds. The formula for WACC is:

WACC = (Equity/Total Value) x Cost of Equity + (Debt/Total Value) x Cost of Debt x (1 - Tax Rate)

Plugging in the values:

Equity = $10 million

Market-to-book ratio = 1.5

Cost of Equity = 13%

Debt = $6 million

Yield to Maturity = 9%

Tax Rate = 21%

Total Value = Equity + Debt = $10 million + $6 million = $16 million

Now we can calculate the WACC:

WACC = (10/16) x 0.13 + (6/16) x 0.09 x (1 - 0.21)

WACC ≈ 0.8125 x 0.13 + 0.375 x 0.09 x 0.79

WACC ≈ 0.105625 + 0.0334125 ≈ 0.1390375 (or 13.90%)