Answer:
13.38%
Explanation:
The formula to compute WACC is shown below:
= Weightage of debt × cost of debt × ( 1- tax rate) + (Weightage of common stock) × (cost of common stock)
where,
Market value of equity = 2,800,000 × $50 = $140,000,000
Market value of debt = 10,000,000 × 95% = $9,500,000
Weighted of debt = Debt ÷ total firm
The total firm includes debt, preferred stock, and the equity which equals to
= $140,000,000 + $9,500,000
= $149,500,000
So, Weighted of debt = ($9.5 million ÷ $149.50 million) = 0.0635
And, the weighted of common stock = (Common stock ÷ total firm)
= $140 million ÷ $149.50 million
= 0.9364
And, the cost of equity = risk free rate of return + Beta × market risk premium
= 5% + 1.25 × 7%
= 5% + 8.75%
= 13.75%
Now put these values to the above formula
So, the value would equal to
= ( 0.0635 × 12%) × ( 1 - 35%) + (0.9364 × 13.75%)
= 0.4953 + 12.88%
= 13.372%
