Question

ABC Corp. has 2,000 bonds outstanding with a $1,000 face value, an 9 percent coupon, 8 years to maturity, annual interest payments, and sells at $1,105.38. The firm also has 40,000 shares of common stock outstanding at a market price of $85 a share and a beta of 0.67. The risk-free rate is 4 percent, the market return is 15 percent, and the tax rate is 20 percent. What is WACC?

Answer 1

The value of WACC is 6.72%

what is WACC?

WACC is calculated by multiplying the cost of each capital source (debt and equity) by its relevant weight by market value, and then adding the products together to determine the total.

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)]

Market value of Equity= 40,000*$85=$3,400,000

Cost of equity=Risk free return+ Beta equity*market retrun

=4 +0.67*15

=7.35

Market value of Debt

=2000*1105.38

=2,210,760

Post tax rate of debt

=9*80(1-20)

=0.0576= 5.76%

WACC= [$3,400,000* 7.35+ 2,210,760 *  5.76%]\ $3,400,000+2,210,760

=6.72%

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