Question

Charlotte's Crochet Shoppe has 15.200 shares of common stock outstanding at a price per share of $78 and a rate of return of 11.73 percent. The company aiso has 310 bonds outstanding. with a par value of $2,000 per bond. The pretax cost of debt is 6.19 percent and the bonds sell for 98.1 percent of par. What is the firm's WACC if the tax rate is 40 percent? ?

O 9.85%
O 10.28%
O 8.54%
O 9.01%
O 8 70%

Answer 1

To calculate the weighted average cost of capital (WACC) for Charlotte's Crochet Shoppe, you'll need to calculate the cost of equity and the cost of debt, and then weight them based on the proportion of equity and debt in the company's capital structure.

Step-by-step explanation:

The weighted average cost of capital (WACC) is the average rate of return a company needs to provide to its investors in order to attract their investment. It is calculated by taking into account the cost of equity and the cost of debt. To find the WACC, we need to calculate the cost of equity and the cost of debt, and then weight them based on the proportion of equity and debt in the company's capital structure.

The cost of equity can be calculated using the capital asset pricing model (CAPM) which is: Cost of Equity = Risk-Free Rate + Beta * (Expected Market Return - Risk-Free Rate).

The cost of debt can be calculated using the formula: Cost of Debt = Pretax Cost of Debt * (1 - Tax Rate).

By plugging in the given values for the cost of equity, cost of debt, tax rate, and the proportions of equity and debt in the capital structure, we can calculate the WACC for Charlotte's Crochet Shoppe.