Question

ABC Corporation has 2.8 million shares of stock outstanding. The stock currently sells for $50 per share. The firm’s debt is publically traded and was recently quoted at 95 percent of its face value. It has a total face value of $10 million, and it is currently priced to yield 12 percent. The risk-free rate is 5 percent, and the market risk premium is 7 percent. You’ve estimated that ABC has a beta of 1.25. If the corporate tax rate is 35 percent, what is the WACC of ABC Corporation?

Answer 1

13.38%

Step-by-step explanation:

total equity = 2,800,000 x $50 = $140,000,000

cost of equity = risk free rate of return + Beta × (market rate of return – risk free rate of return) = 5% + (1.25 x 7%) = 13.75%

total debt = $10,000,000 x 95% = $9,500,000 x 12%

total financing = $140,000,000 + $9,500,000 = $149,500,000

corporate tax rate = 35%

WACC = ($140,000,000/$149,500,000 x 13.75%) + ($9,500,000/$149,500,000 x 12% x 0.65) = 12.88% + 0.5% = 13.38%