Question

Upton Umbrellas has a cost of equity of 12.7 percent, the YTM on the company's bonds is 5.6 percent, and the tax rate is 40 percent. The company's bonds sell for 104.3 percent of par. The debt has a book value of $441,000 and total assets have a book value of $963,000. If the market-to-book ratio is 3.07 times, what is the company's WACC?

Answer 1

Answer:

WACC = 9.76%

Explanation:

First lets calculate the Market value of a firms equity and debt.

Market value of Equity = 963,000 * 3.07 = $2,956,410

Market value of Debt = 441,000 * 3.07 = $1,353,870

WACC =

Weight of equity * return on equity + weight of debt * return on debt * (1 - tax rate)

This gives us,

=[(2956410/(2956410 + 1353870))*0.127]+[(1353870/(2956410+1353870)*0.056] * (1 - 0.40)

WACC = 0.087 + 0.0106 = 0.0976 or 9.76%

Hope that helps.