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# kkk - WACC Number of common stocks = \$10m/\$20 = 500,000...

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10/20/99 C:\classes\301\301.doc Find the cost of capital (WACC) of William Tell Computers. The total book value of the firm’s equity is \$10 million and book value per share is \$20. The stock sells for a price of \$30 per share, and the cost of equity is 12 percent. The firm’s bonds have a book value of \$6 million and sell at a price of \$120 percent of par. The before-tax yield to maturity on the bonds is 8 percent, and the firm’s tax rate is 30%. Use market values to calculate the
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Unformatted text preview: WACC. Number of common stocks = \$10m/\$20 = 500,000 Market value of equity = \$30*500,000 = \$15m Number of bonds = \$6m/\$1000 = 6,000 Market price of a bond = \$1,000*120% = \$1,200 Market value of debt = \$1,200*6,000 = \$7.2m Market capitalization = \$15m+\$7.2m = \$22.2m Weight for equity = \$15m/\$22.2m = 0.675676 Weight for debt = \$7.2m/\$22.2m = 0.324324 Cost of equity = 12% Cost of debt (after-tax) = 8%(1-30%) =5.6% WACC = 12%(15/22.2) + 5.6%(7.2/22.2) = 9.17%...
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