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WACC based on market-value weights

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Richardson Electronics has issued long-term bonds with a total market value of $50
million, and these bonds currently earn an expected return (rd) of 9 percent.
Additionally, Richardson has 4 million shares of common stock outstanding, with each
share trading for $10 (P0 = $10). At this price per share the stocks offer an expected
return of 17 percent.

What is the weighted average cost of capital (WACC) for Richardson Electronics based on market-value weights? Assume that the firm pays a tax rate of 40% (so that t = 0.40).

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Solution Summary

Richardson Electronics has issued long-term bonds with a total market value of $50
million, and these bonds currently earn an expected return (rd) of 9 percent.
Additionally, Richardson has 4 million shares of common stock outstanding, with each
share trading for $10 (P0 = $10). At this price per share the stocks offer an expected
return of 17 percent.

What is the weighted average cost of capital (WACC) for Richardson Electronics based on market-value weights? Assume that the firm pays a tax rate of 40% (so that t = 0.40).

$2.19