Question

Delta Lighting has 30,000 shares of common stock outstanding at a market price of $15.00 a share. This stock was originally issued at $31 per share. The firm also has a bond issue outstanding with a total face value of $280,000 which is selling for 86 percent of par. The cost of equity is 13 percent while the after-tax cost of debt is 6.9 percent. The firm has a beta of 1.48 and a tax rate of 30 percent. What is the weighted average cost of capital? A. 10.07 percentB. 10.87 percentC. 12.36 percentD. 13.29 percentE. 13.47 percent

Answer 1

Answer:

Option (B) 10.87%

Explanation:

Data provided in the question:

common stock outstanding = 30,000

Market price = $15.00

Issuing price of share = $31 per share

Total face value = $280,000

Selling price = 86% of par

Cost of equity, ke = 13%

After-tax cost of debt, kd = 6.9%

Beta = 1.48

Tax rate = 30%

Now,

Market value of debt, Md = Total face value × Selling price

= $280,000 × 86%

= $240,800

Market value of equity, Me = Stocks outstanding × Market price

= 30,000 × $15

= 450,000

Thus,

WACC = [ Kd × Md + Ke × Me ] ÷ ( Md + Me )

= [ 0.069 × $240,800 + 0.13 × $450,000 ] ÷ ( $240,800 + $450,000 )

= $75,115.20 ÷ $690,800

= 0.1087

or

= 0.1087 × 100%

= 10.87%

Option (B) 10.87%