Question

Double-Major Co. has a cost of equity of 11.7 percent and an aftertax cost of debt of 4.47 percent. The company's balance sheet lists long- term debt of $345,000 and equity of $605,000. The company's bonds sell for 104.3 percent of par and market-to-book ratio is 2.83 times. If the company's tax rate is 40 percent, what is the WACC? Multiple Choice Ο 10.13% Ο 9.07% Ο 10.44% Ο 11.10% Ο 9.60%

Answer 1

Market to book ratio = Market value / book value

2.83 = Market value / 605,000

Market value = 1,712,150

Market value of debt = 104.3% of 345,000 = 359,835

Total market value = 1,712,150 + 359,835 = 2,071,985

WACC = Weights * costs

WACC = (359,835 / 2,071,985)*0.0447 + (1,712,150 / 2,071,985)*0.117

WACC = 0.007763 + 0.096681

WACC = 0.1044 or 10.44%