XYZ Industries has 10 million shares of stock outstanding selling at $10 per share and an issue of $30 million in 8.5 percent, annual coupon bonds with a maturity of 25 years, selling at 102 percent of par ($1000). If XYZ's weighted average tax rate is 40 percent and its cost of equity is 15 percent, what is XYZ's WACC?
A) 8.06%
B) 11.75%
C) 12.65%
D) 13.43%

Question

Quizplus · Accepted Answer

1. Calculate the market value of equity:
10 million shares * $10 per share = $100 million

2. Calculate the market value of debt:
$30 million * 1.02 = $30.6 million

3. Calculate the total market value of the firm:
$100 million + $30.6 million = $130.6 million

4. Calculate the weight of equity:
$100 million / $130.6 million = 0.766

5. Calculate the weight of debt:
$30.6 million / $130.6 million = 0.234

6. Calculate the after-tax cost of debt:
8.5% * (1 - 0.40) = 5.1%

7. Calculate WACC:
(0.766 * 0.15) + (0.234 * 0.051) = 12.65%

XYZ Industries Has 10 Million Shares of Stock Outstanding Selling