Delta Lighting has 30,000 shares of common stock outstanding at a market price o

Question

Delta Lighting has 30,000 shares of common stock outstanding at a market price of $15 a share. This stock was originally issued at $31 per share. The firm also has a bond issue outstanding with a total face value of $280,000 which is selling for 86 percent of par. The cost of equity is 13 percent while the aftertax cost of debt is 6.9 percent. The firm has a beta of 1.48 and a tax rate of 30 percent. What is the weighted average cost of capital?

A.10.07 percent

B.10.87 percent

C.12.36 percent

D.13.29 percent

E.13.47 percent

Explanation / Answer

Market value of debt Md = 280,000 x 86%

                                                = 240,800

Market value of equity Me= no. of stocks outstanding x current price

                                                = 30,000 x 15

                                                = 450,000

Ke =13%

Kd= 6.9%

WACC= (Kd x Md + Ke x Me)/(Md+Me)

            = (0.069 x 240,800 + 0.13x450,000)/(240,800+450,000)

            = 75,115.20/690,800

            = 10.87%

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