Question

Wacc. here is some information about stokenchurch inc.: beta of common stock = 1.2 treasury bill rate = 4% market risk premium = 7.5% yield to maturity on long-term debt = 6% book value of equity = $440 million market value of equity = $880 million long-term debt outstanding = $880 million corporate tax rate = 35% what is the company's wacc? (lo13-3)

Answer 1

Answer:

8.45%

Explanation:

The formula used to calculate WACC is:

WACC = {[total equity/(total debt + equity)] x cost of equity} +  {[total debt/(total debt + equity)] x cost of debt x (1 - tax rate)}

first we have to calculate the cost of equity:

cost of equity = risk free rate + (beta x market risk premium) = 4% + (1.2 x 7.5%) = 4% + 9% = 13%

now, WACC:

WACC = {[880/(880+880)] x 13%} + {[880/(880+880)] x 6% x (1 - 35%)} = (0.5 x 13%) + (0.5 x 6% x 0.65) = 6.5% + 1.95% = 8.45%

WACC = weighted average cost of capital is the rate at which the company effectively finances its assets