The total book value of WTC's equity is $10 million, and book value per share is $20. The stock has a market-to-book ratio of 1.5, and the cost of equity is 15%. The firm's bonds have a face value of $5 million and sell at a price of 110% of face value. The yield to matu - rity on the bonds is 9%, and the firm's tax rate is 40%. Find the company's WACC. (LO13-1)

12.88%

Explanation:

The formula to compute the WACC is shown below:

= Weightage of debt * cost of debt * (1 - tax rate) + ((Weightage of common stock) * (cost of common stock)

where,

Market Value of Equity is

= Book Value of Equity * Market to book ratio

= $10 million * 1.5

= $15 million.

Market value of debt = Face Value * Percentage of par value

= $5 million * 110%

= $5.50 million

Now

Weight of debt = Debt : (Debt + Equity)

= $5.50 : ($5.50 + $15)

= 26.83%

And,

Weight of equity = Equity : (Debt + Equity)

= $150 : ($5.50 + $15)

= 73.17%

Now the WACC is

= 26.83% * 9% * (1 - 21%) + (73.17% * 15%)

= 1.91% + 10.98

= 12.88%