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A company's balance sheets show a total of $30 million long-term debt
with a coupon rate of 9 percent. The yield to maturity on this debt is 11.11
percent, and the debt has a total current market value of $25 million. The
balance sheets also show that that the company has 10 million shares of
stock; the total of common stock and retained earnings is $30 million. The
current stock price is $7.5 per share. The current return required by
stockholders, rS, is 12 percent. The company has a target capital
structure of 40 percent debt and 60 percent equity. The tax rate is 40%.
What weighted average cost of capital should you use to evaluate
potential projects?

Solution Preview

The WACC should be based on the target capital structure and market value returns
The after tax cost of debt is 11.11%X(1-0.4)=6.666%.
The ...

Solution Summary

The solution explains how to calculate the WACC