Question

Delta Lighting has 30,000 shares of common stock outstanding at a market price of $15 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 currently selling for 82 percent of par. The cost of equity is 14 percent while the after-tax cost of debt is 6.8 percent. The firm has a beta of 1.48 and a tax rate of 30 percent. What is the weighted average cost of capital?

Answer 1

Answer:

the weighted average cost of capital is 11.57 % .

Explanation:

Market Value of Equity = Number of Common Shares Outstanding × Market Price per share

                                      = 30,000 shares × $15

                                      = $450,000

Market Value of Debt = Face Value × 82%

                                    = $280,000 × 82%

                                    = $229,600

WACC = Ke × (E/V) + Kd × (E/V)

           = 14.00 % × ($450,000/ $679,600) + 6.80 %  × ($229,600/ $679,600)

           = 9.27 % + 2.30 %

           = 11.57 %