Homework Answers
Debt:
Face Value of Bonds = $79,000,000
Market Value of Debt = 94% * $79,000,000
Market Value of Debt = $74,260,000
Annual YTM = 7.00%
Before-tax Cost of Debt = 7.00%
After-tax Cost of Debt = 7.00% * (1 - 0.21)
After-tax Cost of Debt = 5.53%
Equity:
Number of shares outstanding = 2,900,000
Current Price = $46
Market Value of Equity = 2,900,000 * $46
Market Value of Equity = $133,400,000
Cost of Equity = 16.00%
Market Value of Firm = Market Value of Debt + Market Value of
Equity
Market Value of Firm = $74,260,000 + $133,400,000
Market Value of Firm = $207,660,000
Weight of Debt = $74,260,000 / $207,660,000
Weight of Debt = 0.3576
Weight of Equity = $133,400,000 / $207,660,000
Weight of Equity = 0.6424
WACC = Weight of Debt * After-tax Cost of Debt + Weight of
Equity * Cost of Equity
WACC = 0.3576 * 5.53% + 0.6424 * 16.00%
WACC = 12.26%
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