Question

Charlotte's Crochet Shoppe has 11,300 shares of common stock outstanding at a price per share of $65 and a rate of return of 11.21 percent. The company also has 340 bonds outstanding, with a par value of $1,000 per bond. The pretax cost of debt is 5.93 percent and the bonds sell for 94.2 percent of par. What is the firm's WACC if the tax rate is 39 percent

Answer 1

Please see below

Step-by-step explanation:

Given that;

Common stock outstanding = 11,300

Price per share = $65

Number of bonds outstanding = 340

Bonds sell for $94.2 percent of par

Par value per bond = $1,000

Market value of common stock = Common stock outstanding × Price per share

= 11,300 × $65

= $734,500

Market value of debt:

Number of bonds outstanding × [Percent of par × Par value]

= 340 × [0.942 × $1,000]

= 340 × $942

= $320,280

Total market value:

= Market value of common stock + Market value of debt

= $734,500 + $320,280

= $1,054,780

WACC:

= [(Market value of debt ÷ Total market value) × Pretax cost of debt × (1 - Tax rate)] + [(Market value of common stock ÷ Total market value) × Rate of return]

= [($320,280 ÷ $1,054,780) × 0.00593 × (1 - 0.39)] + [($734,500 ÷ $1,054,780) × 0.1121]

= [(0.303646258) × 0.0036173 + [0.00780612545]

= 0.0010983796 + 0.00780612545

= 0.008904505

= 0.89%