Calculating W A CC. Find the WACC of William Tell Computers. The total book value of the

QUESTION

Calculating W A CC. Find the WACC of William Tell Computers. The total book value of the firms equity is $10 million; book value per share is $20. The stock sells for a price of $30 per share, and the cost of equity is 15 percent. The firms bonds have a par value of $5 mil- lion and sell at a price of 110 percent of par. The yield to maturity on the bonds is 9 percent, and the firms tax rate is 40 percent.
Solution Book value Weights Cost WACC Equity 10 66.67% 15% 10.00% Bonds 5 33.33% 5.40% 1.80% Total 15 11.80% WACC = Weighted Cost of Equity add Weighted Cost of Bonds Cost of Equity = 15% Cost of Bonds = Cost (1-tax rate) = 9%(1-0.40) = 5.40% Weighted Cost of Equity = Weight * Cost of Equity = 66.67% of 15 = 10% Weighted Cost of Bonds = Weight * Cost of Bonds = 33.33% of 5.40 = 1.80% Weight of Equity =

k Value of Equity / Book value of equity add Book Value of Bonds Weight of Equity = 10/10 add 5 *100 Weight of Equity = 66.67 % Weight of Bonds = Book Value of Bonds / Book value of Equity add Book Value of Bonds Weight of Bonds = 5/10 add 5 *100 Weight of Bonds = 33.33 %

ANSWER:

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