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Skolits Corp. has a cost of equity of 11.5 percent and an aftertax cost of debt of 4.35 percent. The company's balance sheet lists long-term debt of $325,000 and equity of $585,000. The company's bonds sell for 96.1 percent of par and market-to-book ratio is 2.71 times. If the company's tax rate is 39 percent, what is the WACC

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Answer:

10.32%

Explanation:

Given :

Long term debt = 325000

Percent of par = 96.1% = 0.96

Market to book ratio = 2.71

Equity = 585000

Cost of debt = 0.0435

Cost of equity = 0.115

Market value of debt:

Bond sell for percent of par × long-term debt

0.96 × $325000

= $312,000

Market value of equity:

Equity × Market-to-book ratio

$585,000 × 2.71

$1585350

Total market value:

Market value of debt + Market value of equity

$312000 + $1585350

= $1897350

Weight of debt:

Market value of debt / Total market value

$312000 ÷ $1897350

= 0.1644

Weight of equity:

= 1 - Weight of debt

= 1 - 0.1644

= 0.8356

WACC:

= (weight of equity × cost of equity) + (weight of debt × cost of debt )

= (0.8356 × 0.115)+(0.1644 × 0.0435)

= 0.1032

= 10.32%

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