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Hollydale's is a clothing store in East Park. It paid an annual dividend of ​$1.901.90 last...

Hollydale's is a clothing store in East Park. It paid an annual dividend of ​$1.901.90 last year to its shareholders and plans to increase the dividend annually at 4.0%. It has 600,000 shares outstanding. The shares currently sell for$27.27 per share. Hollydale's has 17,000 semiannual bonds outstanding with a coupon rate of 77​%, a maturity of 21​years, and a par value of​ 1,000. The bonds are currently selling for $738.65 per bond. What is the adjusted WACC for​ Hollydale's if the corporate tax rate is 25​%?

What is the adjusted WACC for​ Hollydale's if the corporate tax rate is 25​%?

Solutions

Expert Solution

In order to calculate WACC in this question, we will multiply cost of each component of capital with its respective weight.

In the given formula,

· Rs = cost of equity

· Rd = cost of debt

· Ws= weight of equity i.e. Market Value of firm's Equity / Total market value of firm's financing ( Percentage of financing through equity)

· Wd = weight of debt i.e. Market Value of firm's long-term debt / Total market value of firm's financing ( Percentage of financing through long-term debt)

· T = corporate tax rate

Total market value of firm's financing = Market Value of Equity + Market Value of Debt

WACC= Rs x Ws + Rd (I-T) x Wd

jeff jeffy answered 2 years ago
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