Note: Not using excel. Please show all steps. Bolster Foods’ book value balance

Question

Note: Not using excel. Please show all steps.

Bolster Foods’ book value balance sheet shows a total of $25 million long-term debt with a coupon rate of 8.5%. The bond has 15 years remaining, and it’s currently trading at 120% of the face value. The firm issued $100 million worth of common stock originally at $10 book value per share. It is now traded at $20 per share. If the risk-free rate is 3%, the expected market return is 6%, beta of firm’s equity is 1.5, and corporate tax rate is 35%, what is the company’s WACC?

Explanation / Answer

Book Value Market Value Cost rate After Tax Rate Long Term debt $25 Million $30 Million 8.50% 5.53% Equity $100 Million $200 Million 10.50% 10.50% Expected Return on equity = Expected Market rate of return + Beta ( Expected Market rate of return - risk free rate) Expected Return on equity = 0.06 + 1.5 (0.06 - 0.03) = 0.105 i.e 10.50% Computation of WACC Market Value Weightage Cost rate Multiplication A B A * B Long Term debt $3,00,00,000.00                               0.13 0.085                                             0.01 Equity $20,00,00,000.00                               0.87 0.105                                             0.09 Total $23,00,00,000.00                               1.00                                             0.10 Company's WACC = 10%

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