JJ's Ice Cream has 1,800 bonds outstanding that are selling for $1,015 each,mature in 11 years,and have an aftertax rate of return of 6.2 percent.There are 45,000 shares of common stock outstanding with a market price of $50 a share.The next annual dividend will be $2.40 per share with annual increases thereafter of 2.5 percent.The risk-free rate is 4 percent,the market risk premium is 7 percent,and the tax rate is 35 percent.What is the company's WACC?

Question

Quizplus · Accepted Answer

MV_Debt = 1,800 × $1,015 = $1,827,000 MV_Equity = 45,000 × $50 = $2,250,000 MV_{D + E} = $1,827,000 + $2,250,000 = $4,077,000 R_S = $2.40 / $50 + 0.025 = 0.073 WACC = ($2,250,000 / $4,077,000)(0.073)+ ($1,827,000 / $4,077,000)(0.062)= 0.0681,or 6.81%

JJ's Ice Cream Has 1,800 Bonds Outstanding That Are Selling