Question

ABC Corporation has the following information: Total market value of a company’s stock: $650 million Total market value of the company’s debt: $150 million Cost of Equity: 10% Cost of Debt: 8% Corporate tax rate is 35 percent What is the WACC of ABC Corporation?

A. 8.125%
B. 9.10%
C. 9.75%
D. 10.05%
E. 10.50%

Answer 1

option (B) 9.10%

Step-by-step explanation:

Data provided in the question:

Total market value of a company’s stock = $650 million

Total market value of the company’s debt = $150 million

Cost of Equity, ke = 10% = 0.10

Cost of Debt, kd = 8% = 0.08

Corporate tax rate, T = 35%

Now,

WACC =
`Kd *(1-T)*(Debt)/(Debt +Equity) + Ke*(Equity)/(Debt +Equity)`

on substituting the respective value, we get

WACC =
`0.08*(1-0.35)*(150\ million)/(150\ million+650\ million ) + 0.10*(650\ million )/(150\ million +650\ million )`

= 0.08 × 0.65 × 0.1875 + 0.10 × 0.8125

= 0.00975 + 0.08125

= 0.091

or

= 0.091 × 100% = 9.10%

Hence,

The correct answer is option (B) 9.10%