Tapley Inc. recently hired you as a consultant to estimate the company

QUESTION

Tapley Inc. recently hired you as a consultant to estimate the companys WACC. You have obtained the following information. (1) Tapleys bonds mature in 25 years, have a 7.5% annual coupon, a par value of $1,000, and a market price of $936.49. (2) The companys tax rate is 40%. (3) The risk-free rate is 6.0%, the market risk premium is 5.0%, and the stocks beta is 1.5. (4) The target capital structure consists of 30% debt and 70% equity. Tapley uses the CAPM to estimate the cost of equity, and it does not expect to have to issue any new common stock. What is its WACC?a. 9.89%b.10.01%c.10.35%d.10.64%e.10.91%Use financial calculator for solution
Solution: Computation of the WACC Answer is E i.e. 10.91% Explanation: Use financial calculator for solution Par value = 1,000 Coupon interest (8%/4) 75 PV = -936.49 No. of years = 25 Cost of debt 8.1% After tax cost¦

f debt = 4.86% Cost of common stock = r RF (r M r RF ) b = 6% (5%) 1.5 = 13.5% WACC = 4.86% x 30% 13.5% x 70% = 10.91% Hence the WACC is 10.91%

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