Question

Charlotte's Crochet Shoppe has 13,100 shares of common stock outstanding at a price per share of $71 and a rate of return of 11.45 percent. The company also has 400 bonds outstanding, with a par value of $1000 per bond. The pretax cost of debt is 6.05 percent and the bonds sell for 96 percent of par. What is the firm's m's WACC if the tax rate is 39 percent?

o 9.87%
o 8.87%
o 8.70%
o 9.18%

Answer 1

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

Step-by-step explanation:

The weighted average cost of capital (WACC) is used to calculate the average rate of return a company needs to earn on its investments to satisfy its shareholders. To calculate the WACC, we need to consider the cost of both equity and debt. Here's how to calculate it:

1. Calculate the cost of equity: multiply the number of shares by the price per share and the rate of return. In this case, 13,100 * $71 * 11.45%.
2. Calculate the pretax cost of debt: multiply the number of bonds by the par value per bond and the cost of debt. In this case, 400 * $1000 * 6.05%.
3. Calculate the after-tax cost of debt: multiply the pretax cost of debt by (1 - tax rate). In this case, the tax rate is 39%, so the after-tax cost of debt is 6.05% * (1 - 39%).
4. Calculate the weight of equity and debt: divide the market value of equity by the sum of the market value of equity and debt. In this case, the market value of equity is the cost of equity and the market value of debt is the par value of the bonds multiplied by the selling price of the bonds, which is 400 * $1000 * 0.96.
5. Finally, calculate the WACC by multiplying the weight of equity by the cost of equity and the weight of debt by the after-tax cost of debt, and summing these two values. In this case, (weight of equity * cost of equity) + (weight of debt * after-tax cost of debt).