Wilson's has 10,000 shares of common stock outstanding at a market price of $35 a share. The ﬁrm also has a bond issue outstanding with a total face value of $250,000 which is selling for 102
Percent of face value. The cost of equity is 11 percent while the pre-tax cost of debt is 8 percent.
The ﬁrm has a beta of 1.1 and a tax rate of 34 percent. What is Wilson's weighted average cost of
Capital?

Question

Quizplus · Accepted Answer

The correct answer is A.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 = tax rateIn this case, we have:E = 10,000 shares * $35 per share = $350,000V = $350,000 + $250,000 * 1.02 = $605,000Re = 11%D = $250,000 * 1.02 = $255,000Rd = 8%Tc = 34%Plugging these values into the formula, we get:WACC = (350,000/605,000) * 11% + (255,000/605,000) * 8% * (1 - 34%)WACC = 0.578 * 11% + 0.422 * 8% * 0.66WACC = 6.36% + 2.23%WACC = 8.59%

Wilson's Has 10,000 Shares of Common Stock Outstanding at a Market