Rekall Inc.,the memory implant company,has 7 million shares of common stock outstanding and 100,000 semi-annual bonds.The bonds have 6 years to maturity,a 9.05% coupon rate and a face value of $1,000 each.The common stock currently sells for $29.94 and just paid a dividend of $2.50.Dividends are paid annually and are expected to grow in perpetuity at 3%.The bonds sell for 94% of face value and have a 10.42% yield to maturity.The after-tax cost of debt is 7.294%,and the cost of equity is 11.6%.What is Rekall's WACC?

Question

Quizplus · Accepted Answer

Step 1 - Calculate the value of the firm's securities. V = E + D E = $29.94 × 7M = $209.58MD = $940 × 100,000 = $94MV = $303.58M Step 2 - Calculate the weight of debt and equity. W_d = D/V W_d = $94 / $303.58 = 30.96% W_e = E/V W_e = $209.58 / $303.58 = 69.04% Step 3 - Compute the WACC. WACC = W_dK_d 11ea7fdb_fc73_952f_a768_45f3da23fc39_TB2902_11 + W_pK_p + W_eK_e WACC = (0.3096 × 0.07294) + (0.6904 × 0.116) = 10.27%