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Farhat Wineries: Compute WACC

Farhat Wineries is a privately held (not publicly traded) firm with the following balance sheet:

Farhat Wineries ($ in millions)
Assets 100 Long-term debt 40
Equity 60
Total 100 Total 100

In addition, you obtain the following information:

? The debt consists of perpetual bonds (they pay interest forever, and never mature) that pay an annual coupon of 10% on their $1,000 face value. Similar publicly traded bonds are currently yielding 8%.

?There are 1 million shares of common stock. Common stock of other publicly traded brewery firms currently has a market-to-book ratio of 2.8, (its market value is 2.8 times its book value) and a beta of 1.2.

?The current yield on 10-year Treasury bonds is 5%, and the expected return on the S&P 500 stock index is 11%.

?The tax rate is 40%.

(a) Compute the weighted average cost of capital.

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The answers are in attached file

Farhat Wineries is a privately held (not publicly traded) firm with the following balance sheet:

Farhat Wineries ($ in millions)
Assets 100 Long-term debt 40
Equity 60
Total 100 Total 100

In addition, you obtain the following information:

? The debt consists of perpetual bonds (they pay interest forever, and never mature) that pay an annual coupon of 10% on their $1,000 face value. Similar publicly traded bonds are currently yielding 8%.

?There are 1 million shares of common stock. ...

Solution Summary

Calculates the weighted average cost of capital (WACC).

$2.19