Question

Skolits Corp. has a cost of equity of 11.1 percent and an aftertax cost of debt of 4.65 percent. The company's balance sheet lists long-term debt of $375,000 and equity of $635,000. The company's bonds sell for 105.5 percent of par and market-to-book ratio is 3.01 times. If the company's tax rate is 35 percent, what is the WACC

Answer 1

Answer:

The WACC is 8.71%.

Explanation:

The weighted average cost of capital (WACC) is simply the average rate a firm is expected to pay as cost financing its assets to those who hold its securities.

The WACC can be computed as follows:

Total debt and equity = Debt + Equity = $375,000 + $635,000 = $1,010,000

WE = Weight of equity = Equity / Total debt and equity = $635,000 / $1,010,000 = 0.63, or 63%

WD = Weight of equity = Debt / Total debt and equity = $375,000 / $1,010,000 = 0.37, or 37%

CE = Cost of equity = 11.1%

ACD = After tax cost of debt = 4.65%

Therefore, we have:

WACC = (WE * CE) + (WD * ACD) = (63% * 11.1%) + (37% * 4.65%) = 6.99% + 1.72% = 8.71%

Therefore, the WACC is 8.71%.