Buster's Ice Cream has 2,500 bonds outstanding that are selling for $1,020 each and yielding a pretax 7.2 percent.There 60,000 shares of common stock outstanding with a beta of 1.3 and a market price of $56 a share.The risk-free rate is 4 percent,the market risk premium is 7 percent,and the tax rate is 35 percent.What is WACC?

Question

Quizplus · Accepted Answer

MV_Debt = 2,500 × $1,020 = $2,550,000MV_Equity = 60,000 × $56 = $3,360,000MV_{D + E} = $2,550,000 + 3,360,000 = $5,910,000R_S = .04 + 1.3 × .07 = .1310,or 13.10%WACC = ($3,360,000/$5,910,000)× .1310 + ($2,550,000/$5,910,000)× .072 × (1 - .35)= .0947,or 9.47%

Buster's Ice Cream Has 2,500 Bonds Outstanding That Are Selling