Question

Skolits corp. has a cost of equity of 11.3 percent and an aftertax cost of debt of 4.29 percent. the company's balance sheet lists long-term debt of $315,000 and equity of $575,000. the company's bonds sell for 95.7 percent of par and market-to-book ratio is 2.65 times. if the company's tax rate is 40 percent, what is the wacc?

Answer 1

The correct answer is 10.12%.

Step-by-step explanation:

Market value of Equity = $575,000 × 2.65= $1,523,750

Market value of Long term debt = 315000 × 95.7 ÷ 100

=$301,455

Total value of financing = Equity + Debt

= $1,523,750 + $301,455

= $1,825,205

Weighted average cost of capital (WACC) = Market value of equity ÷ Total value of financing × Equity cost + Market value of debt ÷ Total value of financing × Cost of debt

=$1,523,750 ÷ $1,825,205 × 11.3 + $301,455 ÷ $1,825,205 × 4.2

= 9.43 + 0.69

= 10.12%