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Calculate the WACC with the following information: Equity Information Debt Information 10,000 shares $200,000 in outstanding...

Calculate the WACC with the following information:

Equity Information Debt Information
10,000 shares $200,000 in outstanding debt (face value)
$60 per share
Beta = 1.28 Current quote = 100
Market risk premium = 10% Annual coupon rate = 10%
Risk-free rate = 4% Tax rate = 30%

Please Please show it step by step and explain it a little bit more, thanks!!!

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Answer #1

Equity:

Number of shares outstanding = 10,000
Market Price per share = $60

Market Value of Equity = Number of shares outstanding * Market Price per share
Market Value of Equity = 10,000 * $60
Market Value of Equity = $600,000

Cost of Equity = Risk-free Rate + Beta * Market Risk Premium
Cost of Equity = 4% + 1.28 * 10%
Cost of Equity = 16.8%

Debt:

Current quote of debt = 100

Current quote is equal to 100, so, the market value of debt will be equal to the face value of debt and coupon rate will be equal to the yield on debt.

Market Value of Debt = $200,000

Pre-tax Cost of Debt = Coupon Rate
Pre-tax Cost of Debt = 10%

After-tax Cost of Debt = Pre-tax Cost of Debt * (1 - tax)
After-tax Cost of Debt = 10% * (1 - 0.30)
After-tax Cost of Debt = 7%

Market Value of Firm = Market Value of Debt + Market Value of Equity
Market Value of Firm = $200,000 + $600,000
Market Value of Firm = $800,000

Weight of Debt = Market Value of Debt / Market Value of Firm
Weight of Debt = $200,000 / $800,000
Weight of Debt = 0.25

Weight of Equity= Market Value of Equity / Market Value of Firm
Weight of Equity = $600,000 / $800,000
Weight of Equity = 0.75

WACC = Weight of Debt * After-tax Cost of Debt + Weight of Equity * Cost of Equity
WACC = 0.25 * 7% + 0.75 * 16.8%
WACC = 14.35%

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