The total book value of the firm’s equity is $16 million; book value per share i
ID: 2754991 • Letter: T
Question
The total book value of the firm’s equity is $16 million; book value per share is $32. The stock sells for a price of $35 per share, and the cost of equity is 13%. The firm’s bonds have a face value of $4 million and sell at a price of 140% of face value. The yield to maturity on the bonds is 7%, and the firm’s tax rate is 40%. Find the WACC of William Tell Computers. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
The total book value of the firm’s equity is $16 million; book value per share is $32. The stock sells for a price of $35 per share, and the cost of equity is 13%. The firm’s bonds have a face value of $4 million and sell at a price of 140% of face value. The yield to maturity on the bonds is 7%, and the firm’s tax rate is 40%. Find the WACC of William Tell Computers. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Explanation / Answer
wacc = kd* debt/ capital employed + Ke * equity/ capital employed
Total capital Emplyed = debt + Equity
DEBT= CURRENT VALUE OFBond = 4* 140% =$ 5.6 million, KD =7% i.e 7% (1- .40)=4.2% after tax
EQUITY= $16 Million , current price of Equity= $35 per share
current market value = $16 million/32= 500000 shares * 35= $17.5 million , KE = 13%
Total Capital employed = debt + equity
= $(5.6 + 17.5)
=$23.1 million
WACC = 4.2 * (5.6/23.1) + 13* (17.5/23.1)
=10.74%
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