You are given the following information concerning Around Town Tours:
Debt:7,500, 6.8 percent coupon bonds outstanding, with 11 years to maturity and a quoted price of 97.9.These bonds pay interest semiannually.
Common stock: 284,000 shares of common stock selling for $68 per share.The stock has a beta of 1.04 and will pay a dividend of $2.62 next year.The dividend is expected to grow by 2.5 percent per year indefinitely.
Preferred stock:9,000 shares of $8 preferred stock selling at $88 per share.
Market: 14.6 percent expected return, 4.1 percent risk-free rate
Company:34 percent tax rate.
Calculate the WACC for this firm.

Question

Quizplus · Accepted Answer

The correct answer is A.The 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 = 284,000 * $68 = $19,232,000V = E + D = $19,232,000 + $7,500,000 = $26,732,000Re = 14.6%D = $7,500,000Rd = 6.8%Tc = 34%Plugging these values into the formula, we get:WACC = (19,232,000/26,732,000) * 14.6% + (7,500,000/26,732,000) * 6.8% * (1 - 34%)= 9.0%

You Are Given the Following Information Concerning Around Town Tours