Answer:
The firm's weighted average cost of capital 5.81%
Explanation:
In order toTo calculate WACC, we need to calculate the cost of equity and after-tax cost of debt. The WACC can be calculated with the use of following formula:
WACC = After-Tax Cost of Debt*Weight of Debt + Cost of Equity*Weight of Equity
Where,
After-Tax Cost of Debt = Pretax Yield*(1-Tax Rate)
Market Value of Debt = Outstanding Bonds*Par Value*Current Selling Percentage
Cost of Equity = D1/Current Market Price + Growth Rate
Market Value of Equity = Number of Common Shares Outstanding*Current Market Price
Weight of Debt = Market Value of Debt/(Market Value of Debt + Market Value of Equity)
Weight of Equity = Market Value of Equity/(Market Value of Debt + Market Value of Equity)
Therefore, Market Value of Debt = 7,500*1,000*98.60% = $7,395,000
Market Value of Equity = 375,000*35 = $13,125,000
Weight of Debt = 7,395,000/(13,125,000 + 7,395,000)
Weight of Equity =$13,125,000
/($13,125,000 + 7,395,000)
Cost of Equity = 1.50/35 + 2% = 6.28% 0.01801
After-Tax Cost of Debt = 7.65*(1-34%) = 5.05%
Using the values calculated above in the formula for WACC, we get,
WACC = 5.05%*7,395,000/(13,125,000 + 7,395,000) + 6.28%
*$13,125,000/($13,125,000 + 7,395,000) = 5.81%
