Assume JBH has debt with a book value of $20 million, trading at 120% of par value. The bonds have a yield to maturity of 6%. The firm has book equity of $20 million, and 2 million shares trading at $18 per share. The firm's cost of equity is 12%. What is JBH's WACC if the firm's marginal tax rate is 30%?

Question

Quizplus · Accepted Answer

First, we need to calculate the market value of debt, which is 1.20*$20 million = $24 million.

Next, we need to calculate the total market value of the firm, which is:

(2 million shares * $18 per share) + $24 million (debt) = $60 million

Then, we can calculate the weight of equity:

Equity weight = (2 million shares * $18 per share) / $60 million = 0.60

The weight of debt is therefore:

Debt weight = $24 million / $60 million = 0.40

Now, we can calculate the after-tax cost of debt:

After-tax cost of debt = 6% * (1 - 0.30) = 4.2%

Finally, we can calculate the WACC:

WACC = (0.60 * 12%) + (0.40 * 4.2%) = 8.88%

Therefore, the best choice is B.

Assume JBH Has Debt with a Book Value of $20