The question is incomplete. The complete question is,
Assume JUP has debt with a book value of $20 million, trading at 120% of par value (hint: par value equals the book value of the debt). The bonds have a yield to maturity of 7%. The firm's book value of equity is $16 million, and it has 2 million shares trading at $19 per share. The firm's cost of equity is 12%. What is JUP's WACC if the firm's marginal tax rate is 35%?
Answer:
WACC = 0.09116 or 9.116% rounded off to 9.12%
Step-by-step explanation:
The WACC or Weighted average cost of capital is the cost of a firm's capital structure that can be made of one or all of the following components namely debt, preferred stock and common equity.
The formula to calculate is as follows,
WACC = wD * tD * (1- tax rate) + wP * rP + wE * rE
Where,
- w represents the weight of each component in capital structure
- r represents the cost of each component
- D, P and E represents debt, preferred stock and Common Equity respectively.
As we don't have preferred stock so our WACC equation will be,
WACC = wD * tD * (1- tax rate) + wE * rE
We first need to determine the total value of capital structure and the market value of each component to determine the weight of each component.
Market value of debt = 20 * 120% = $24 million
Market value of equity = 2 * 19 = $38 million
Total value of capital structure = 24 + 38 = 62 million
WACC = 24/62 * 0.07 * (1 - 0.35) + 38/62 * 0.12
WACC = 0.09116 or 9.116% rounded off to 9.12%