Lumber Jack Log Homes has 30,000 bonds outstanding that are selling at par. Bonds with similar characteristics are yielding 7.8 percent. The company also has 1.5 million shares of common stock
Outstanding. The stock has a beta of 1.4 and sells for $36 a share. Treasury bills are yielding 4.5
Percent and the market risk premium is 8.6 percent. Jack's tax rate is 34 percent. What is Jack's
Weighted average cost of capital?

Question

Quizplus · Accepted Answer

The correct answer is A because the weighted average cost of capital (WACC) is calculated as follows:WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc)where:E = market value of equityV = total value of the firmRe = cost of equityD = market value of debtRd = cost of debtTc = corporate tax rateIn this case, we have:E = 1.5 million shares * $36 per share = $54 millionV = $54 million + $30,000 * $1,000 = $84 millionRe = 4.5% + 1.4 * 8.6% = 12.47%D = $30,000 * $1,000 = $30 millionRd = 7.8%Tc = 34%Therefore, the WACC is:WACC = (54/84) * 12.47% + (30/84) * 7.8% * (1 - 0.34) = 12.47%

Lumber Jack Log Homes Has 30,000 Bonds Outstanding That Are