Delta Lighting has 24,500 shares of common stock outstanding at a market price of $19 a share. This stock was originally issued at $21 per share. The firm also has a bond issue outstanding with a total face value of $250,000 which is selling for 94 percent of par. The cost of equity is 12.6 percent while the aftertax cost of debt is 5.8 percent. The firm has a beta of 1.33 and a tax rate of 23 percent. What is the weighted average cost of capital?

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TomShelby TomShelby · Answer 1 · 2019-08-29T01:49:28+02:00

Answer:

WACC 10.32%

Explanation:

For the WACC we need to calculate the equity and debt at their market value

Equity 24,500 shares x 19 = 465,500

D bonds payable 250,000 at 94 = 235,000

D 235,000

E 465,500

V 700,500

[tex]WACC = K_e(\frac{E}{E+D}) + K_d(1-t)(\frac{D}{E+D})[/tex]

Ke 0.126

Equity weight 0.664525339 (465,500/700,500)

Kd(1-t) 0.058 (we are given with the after tax cost of debt)

Debt Weight 0.335474661 (235,000/700,500)

We plug the values in the formula and solve:

[tex]WACC = 0.126(0.66452533904354) + 0.058(1-0)(0.33547466095646)[/tex]

WACC 10.31877%