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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