Question

Finally There! has 1,500 bonds outstanding with a $1,000 par value, a yield to maturity of 6.4 percent, and a market price of $989 each. The firm also has 74,000 shares of common stock outstanding at a price per share of $35 and a beta of 1.08. The risk-free rate is 2 percent, the market risk premium is 7 percent, and the tax rate is 34 percent. What is the company's WACC?

Answer 1

7.62%

Step-by-step explanation:

The WACC in the given question shall be calculated using the following mentioned formula:

WACC=[(Market value of Equity*cost of equity+Market value of Debt* post tax cost of debt)/(Market value of Equity+Market value of Debt)]

In the given question:

Market value of Equity= 74,000*$35=$2,590,000

Cost of equity=Risk free return+Beta equity*market risk premium

=2%+1.08*7%=9.56%

Market value of Debt=1,500*$989=$1,483,500

Post tax rate of debt=6.4%*66%(1-34%)=4.22%

WACC=[($2,590,000*9.56%+$1,483,500*4.22%)/($2,590,000+$1,483,500)]

=7.62%