Question

Toot-sweet candies has the following set of current capital structure information: equity: 40 million shares, $60/share, beta = 1.25, risk free rate = 5%, expected rate of return =10%, debt: $500 million in outstanding debt, current quote = 105, coupon rate = 9% semi annual, years to maturity = 12, tax rate = 21%. based on the information given, what is the too-sweet candies' weighted average cost of capital (wacc)

Answer 1

The weighted average cost of capital (WACC) is the average rate of return a company needs to earn on its investments to satisfy both shareholders and debt holders. The WACC can be calculated using the cost of equity and the cost of debt. For Too-Sweet Candies, the WACC can be found using the given information on equity, debt, and other factors.

Step-by-step explanation:

The weighted average cost of capital (WACC) is the average rate of return a company needs to earn on its investments to satisfy all stakeholders, including shareholders and debt holders. To calculate WACC, we need to consider both the cost of equity and the cost of debt.

For Too-Sweet Candies, the cost of equity can be calculated using the Capital Asset Pricing Model (CAPM).

Cost of Equity = Risk-Free Rate + Beta (Expected Return - Risk-Free Rate)

Given that the risk-free rate is 5%, the beta is 1.25, and the expected rate of return is 10%, we can plug in these values to calculate the cost of equity.

The cost of debt is the interest expense on the outstanding debt. We can calculate it using the formula:

Cost of Debt = Coupon Rate x (1 - Tax Rate)

Given that the coupon rate is 9% and the tax rate is 21%, we can calculate the cost of debt.

To calculate the WACC, we use the formula:

WACC = (Equity / Total Value) x Cost of Equity + (Debt / Total Value) x Cost of Debt

Plugging in the values we've calculated, we can find the WACC for Too-Sweet Candies.