What is the company’s WACC? (Do not round intermediate calculations. Enter your

Question

What is the company’s WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Here is some information about Stokenchurch Inc.: Beta of common stock = 1.5 Treasury bill rate = 4% Market risk premium = 7.8% Yield to maturity on long-term debt = 7% Book value of equity = $470 million Market value of equity = $940 million Long-term debt outstanding = $940 million Corporate tax rate = 35%

What is the company’s WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Explanation / Answer

Total market value = 940 + 940 = $ 1880

weight of equity = 940/ 1880 = .50

weight of debt   = 1-.50 = .50

After tax cost of debt =debt (1-t)

                                       = 7 (1 - .35)

                                     = 7* .65

                                        = 4.55%

cost of equity =Rf +[Beta *market premium]

                    = 4 + [1.5 *7.8]

                  = 4+ 11.7

                   = 15.7%

WACC= (After ta xcost of debt *Wd) +(Cost of equity *We)

         = (4.55 *.5 ) +(15.7 *.5)

       = 2.275+ 7.85

     = 10.13% approx

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