The Whitehorse Book Company has 140 million shares outstanding.The market price of one share is currently $2.The company's debentures are publicly traded and their market price is equal to 93% of its face value.The debentures have a total book value of $50 000 000 and the current yield to maturity of corporate debenture is 12% per annum.The risk-free rate is 8.50% and the market risk premium is 5.20%.Market analysts estimated that the Whitehorse Book Company has a beta of 0.90.The corporate tax rate is 30%.What is the company's weighted average cost of capital (WACC)considering the imputation tax system?

Question

Quizplus · Accepted Answer

The WACC is calculated using the formula: WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc). Here, E is the market value of equity, D is the market value of debt, V is the total value (E + D), Re is the cost of equity, Rd is the cost of debt, and Tc is the corporate tax rate. The cost of equity (Re) is calculated using the CAPM: Re = Rf + β * (Rm - Rf). Substituting the given values, Re = 8.50% + 0.90 * 5.20% = 13.18%. The market value of equity (E) is 140 million shares * $2 = $280 million. The market value of debt (D) is 93% of $50 million = $46.5 million. The cost of debt (Rd) is the yield to maturity, 12%. The WACC is then calculated as: WACC = ($280M/$326.5M) * 13.18% + ($46.5M/$326.5M) * 12% * (1 - 0.30) = 9.11%.

The Whitehorse Book Company Has 140 Million Shares Outstanding