Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 19, Problem 1PS
Summary Introduction

To determine: WACC (Weighted average cost of capital)

Expert Solution & Answer
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Explanation of Solution

Calculate market value of equity and debt:

Equity=Selling price×Number of shares=$42×2.5 million=$105million

Debt=Percentage of debt×Number of book value of debt outstanding=0.90×$75 million=$67.5million

Compute percentage of debt and equity financing:

DV=DebtDebt+Equity= $67.5$67.5+$105=0.39

EV=EquityDebt+Equity= $105$67.5+$105=0.61

Compute WACC:

WACC=(Market value of equityTotal value of financing×Cost of equity)+(Market value of debtTotal value of financing×Cost of debt×(1Tax rate))=(0.61×0.18)+0.39×0.09×(10.21)=0.1098+0.0277=0.1375or13.75%

Hence, WACC is 13.75%.

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