Question

Here is some information about Stokenchurch Inc.:

Beta of common stock = 1.6

Treasury bill rate = 4%

Market risk premium = 6.9%

Yield to maturity on long-term debt = 8%

Book value of equity = $380 million

Market value of equity = $760 million

Long-term debt outstanding = $760 million

Corporate tax rate = 21%

What is the company’s WACC?

Answer 1

Cost of equity will be calculated using Capital Asset pricing model-

Cost of equity=risk free rate+(beta X market risk premium)

= 4+(1.6*6.9)

= 15.04%

Weights of Equity and that capital will be similar because the value of both the capital is similar so weight of equity and debt will be 50% each.

Weighted average cost of capital= (weight of equity X cost of equity)+(weight of debt X cost of debt) (1-tax)

= (.5*15.04)+(.5*8)(1-.21)

= (7.52+3.16)

= 10.68%