Ray Stokes is raising capital for a new company called NO Balloons Inc.NO Balloons will manufacture and sell festive balloons.Because of the shortage of helium,the balloons will be filled with nitrous oxide instead.NO Balloons plans to finance the business with common equity and long-term debt.It plans to sell 12 million shares of common stock and 200,000 bonds.Each bond will have a coupon rate of 5% and will have a face value of $1,000.The common stock will be issued at a price of $19.5 a share.The bonds will sell for 89% of face value.The after-tax cost of debt is 4% and the cost of equity of 9.275%.What is NO Balloons' WACC?

Question

Quizplus · Accepted Answer

Step 1 - Calculate the value of the firm's securities. V = E + D E = $19.50 × 12M = $234MD = 1,000 × 0.89 × 200,000 = $178MV = $234M + $178M = $412M Step 2 - Calculate the weight of debt and equity. W_d = D/V W_d = $178 / $412 = 43.20% W_e = E/V W_e = $234 / $412 = 56.80% Step 3 - Compute the WACC. WACC = W_dK_d 11ea7fdb_fc72_f8ea_a768_93146a6b4d29_TB2902_11 + W_pK_p + W_eK_e WACC = (0.432 × 0.04) + (0.568 × 0.09275) = 7%

Ray Stokes Is Raising Capital for a New Company Called