Answered

Charlotte's Crochet Shoppe has 14,300 shares of common stock outstanding at a price per share of $75 and a rate of return of 11.61 percent. The company also has 280 bonds outstanding, with a par value of $2,000 per bond. The pretax cost of debt is 6.13 percent and the bonds sell for 97.2 percent of par. What is the firm's WACC if the tax rate is 40 percent?

Answer :

Zviko

Answer:

the firm's WACC is 8.94%

Explanation:

WACC shows the risk of the company. It is the minimum return that a project must offer before it can be accepted.

WACC Calculation

Capital Source         Market Value        Weight            Cost                 Total

Common stock           $1,072,500          66.33%           11.61%                7.70%

Debt                               $544,320          33.67%          3.68%                 1.24%

Total                             $1,616,820          100.00%                                   8.94%

Common stock

Market Value = 14,300×$75

                       =  $1,072,500

Debt

Market Value = 280 ×($2,000×97.2%)

                       =  $544,320

Cost = Market Interest×(1-tax rate)

        = 6.13 % × (1-0.40)

        = 3.68%

anthougo

Charlotte's Crochet Shoppe's Weighted-Average Cost of Capital (WACC) is 8.9%.

Data and Calculations:

Outstanding common stock shares = 14,300

Price per share = $75

Value of common stock = $1,072,500 ($75 x 14,300)

Return of return of common stock = 11.61%

Price of Bonds = $1,944 ($2,000 x 97.2%)

Value of bonds outstanding = $544,320 ($1,944 x 280)

Selling rate of bonds = 97.2%

Pretax cost of debt = 6.13%

After-tax cost of debt = 3.678% (6.13% x (1 - 40%)

Total value of stock and debt = $1,616,820 ($1,072,500 + $544,320)

Weight of common stock = 66.3% ($1,072,500/$1,616,820 x 100)

Weight of bonds = 33.7% ($544,320/$1,616,820 x 100)

WACC = (66.3% x 11.61%) + (33.7% x 3.678%)

= 7.7% + 1.2%

= 8.9%

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