Question

Charlotte's Crochet Shoppe has 16,700 shares of common stock outstanding at a price per share of $83 and a rate of return of 11.93 percent. The company also has 360 bonds outstanding, with a par value of $2,000 per bond. The pretax cost of debt is 6.29 percent and the bonds sell for 99.6 percent of par. What is the firm's WACC if the tax rate is 40 percent?

Answer 1

Answer:

9.15%

Explanation:

Given that,

common stock outstanding = 16,700

Price per share = $83

Number of bonds outstanding = 360

Bonds sell for 99.6 percent of par,

Par value per bond = $2,000

Market value of common stock:

= common stock outstanding × Price per share

= 16,700 × $83

= $1,386,100

Market value of debt:

= Number of bonds outstanding × (Percent of par × Par value)

= 360 × ( 0.996 × 2000)

= $717,120

Total market value:

= Market value of common stock + Market value of debt

= $1,386,100 + $717,120

= $2,103,220

WACC:

= [(Market value of debt ÷ Total market value) × pretax cost of debt × (1 - Tax rate)] + [(Market value of common stock ÷ Total market value) × Rate of return]

= [($717,120 ÷ $2,103,220) × 0.0629 × (1 - 0.4)] + [($1,386,100 ÷ $2,103,220) × 0.1193 ]

= 0.012868 + 0.078623

= 0.0915 or 9.15%