Bruner Breakfast Foods' (BBF) balance sheet shows a total of $20 million long-term debt with a coupon rate of 8.00%. The yield to maturity on this debt is 10.00%, and the debt has a total current market value of $18 million. The balance sheet also shows that that the company has 10 million shares of stock, and total of common equity (common stock plus retained earnings) is $30 million. The current stock price is $4.50 per share, and stockholders' required rate of return, rs, is 12.25%. The company recently decided that its target capital structure should have 50% debt, with the balance being common equity. The tax rate is 40%. Calculate WACCs based on target, book, and market value
Capital structures, and then find the sum of these three WACCs.

Question

Quizplus · Accepted Answer

The WACC based on target capital structure is calculated using the target weights of debt and equity, the after-tax cost of debt, and the cost of equity. The WACC based on book value uses the book values of debt and equity, while the WACC based on market value uses the market values. The sum of these three WACCs is 29.34%.

Bruner Breakfast Foods' (BBF) Balance Sheet Shows a Total of $20