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the total book value of wtc’s equity is $10 million, and book value per share is $20. the stock has a market-to-book ratio of 1.5, and the cost of equity is 15%. the firm’s bonds have a face value of $7 million and sell at a price of 110% of face value. the yield to maturity on the bonds is 6%, and the firm’s tax rate is 21%. what is the company’s wacc?

Sagot :

The weighted average cost of capital (WACC) of company is - 12.06%.

Debt market value (D) = 1.1*$7m = $7.7m

Equity market value (E) =1.5* $10m = $15m

Sum of equity and debt value (V) = $22.7

Current tax (Tc) = 0.21

Equity cost (Re) = 0.15

Debt cost (Rd) = 0.10

WACC = [(E/V) x Re] + [(D/V) x Rd x (1 - Tc)]

             = [15/22.7*0.15] + [7.7/22.7*0.10*(1-0.21)]

            = 0.099 + 0.2765

            = 0.12665*100

            = 12.66%

The weighted average cost of capital (WACC) is a measure of the average costs that businesses incur when financing capital assets. Long-term liabilities and debts such as preferred and common stocks and bonds that companies pay to shareholders and capital investors are examples of capital costs. The WACC, as opposed to measuring capital costs, takes the weighted average of each source of capital for which a company is liable.

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