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?

Question

Business

Sidney Huang

4 April, 15:54

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?

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Phillip Galloway · Answer 1

7.62%

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%