Answer:
NO Balloons' WACC = 7%
Explanation:
WACC = Weighted average cost of capital
The weighted average cost of capital (WACC) refers to calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All sources of capital, including <u>common stock</u>, <u>preferred stock</u>, <u>bonds</u>, and <u>any other long-term debt</u>, are included in a WACC calculation.
<u>Respective calculation of WACC:</u>
<u>Step 1: Calculate the value of equity:</u>
Number of shares = 12 million
Share price = $19.5 per share
Value of equity = 12 million shares * 19.5/share = $234 million (A)
<u>Step 2: Calculate the value of debt: </u>
Bonds = 200,000
Value of debt = 200,000 bonds * 1000 face value/bond * 89% sale price = 178 million (B)
<u>Step 3: Calculate the firm value: </u>
Total firm value (A+B) = 234 + 178 = 412 million
<u>Step 4: Calculate the weight of equity:
</u>
Dividing the value of equity to total firm value:
Weight of equity = 234 / 412 = 0.5680
<u>Step 5: Calculate the weight of debt:
</u>
Dividing the value of debt to total firm value
Weight of debt = 178 / 412 = 0.4320
<u>Step 6: Calculation of WACC
:</u>
WACC = weight of equity * cost of equity + weight of debt * cost of debt = 0.5680 * 9.275% + 0.4320 * 4% = 7%
