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    The WACC of William Tell Computers is 12.43%. To calculate this, the market value of equity is $15 million and debt is $5.5 million, for a total market value of $20.5 million. The cost of equity is 15% and after-tax cost of debt is 5.4% given a pre-tax yield of 9% and 40% tax rate. Using these market values and costs, the WACC is calculated as (Debt/Total Value) x Cost of Debt x (1-Tax Rate) + (Equity/Total Value) x Cost of Equity.

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    The WACC of William Tell Computers is 12.43%. To calculate this, the market value of equity is $15 million and debt is $5.5 million, for a total market value of $20.5 million. The cost of equity is 15% and after-tax cost of debt is 5.4% given a pre-tax yield of 9% and 40% tax rate. Using these market values and costs, the WACC is calculated as (Debt/Total Value) x Cost of Debt x (1-Tax Rate) + (Equity/Total Value) x Cost of Equity.

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    16 views1 page

    Market Price

    Uploaded by

    Adeeba Naz
    The WACC of William Tell Computers is 12.43%. To calculate this, the market value of equity is $15 million and debt is $5.5 million, for a total market value of $20.5 million. The cost of equity is 15% and after-tax cost of debt is 5.4% given a pre-tax yield of 9% and 40% tax rate. Using these market values and costs, the WACC is calculated as (Debt/Total Value) x Cost of Debt x (1-Tax Rate) + (Equity/Total Value) x Cost of Equity.

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    Find the WACC of William Tell Computers.

    The total book value of the firm's equity is $10 million; book value per share is $20. The stock sells for a price of $30 per share, and the cost of equity is 15 percent. The firm's bonds have a par value of $5 million and sell at a price of 110 percent of par. The yield to maturity on the bonds is 9 percent, and the firm's tax rate is 40 percent.
    Number of shares = $10 million / $20 = 0.5 million Calculate market value of equity: E = Number of shares * = 0.5 million * $30 = = $15 million Calculate market value of debt: D = par value * % price of par = = $5 million * 110% = = $5.5 million V = D + E = $20.5 million Compute WACC: WACC = (D/V)*Rd*((1-T) + (E/V)*Re where: Rd = cost of debt (yield to maturity) = 9% T = tax rate = 40% Re = cost of equity = 15% Then William Tell's WACC is: WACC = (5.5/20.5)*0.09*0.60 + (15/20.5)*0.15 = = 0.0145 + 0.1098 = = 0.1243 = 12.43% To complete the question table note that: After Tax cost of debt = Rd*((1-T) = 5.40% After Tax cost of equity = Re = 15% Debt Proportion = D/V = 26.83% Equity Proportion = E/V = 73.17%

    value is $10 million and the value per share is $20. The numer of shares are 10,000,000/20=500,000. The

    market price per share is $30. The market

    value of equity is 500,000X30=$15 million. The cost of equity is 15% For debt - par value is $5 million and they sell for 110% of par. The market value is 5X1.1=$5.5 million. The market value of total capital is 15+5.5=20.5 million. The cost of debt is the YTM and is 9%. Since interest is tax deductible we take the after tax cost of debt. The after tax cost is 9% * (1-0.4)= 5.4% WACC = Proportion of equity X cost of equity + Proportion of debt X cost of debt WACC = 15/20.5 X 15% + 5.5/20.5 X 5.4% WACC = 12.4%

    Stock price =

    Market Value Proportions Cost After tax cost Debt $15 million 26.83% 9% 5.4% Equity $5.5 million 73.17% 15% 15% WACC = 12.43% --------------------------------------------------For finding the WACC we use the market value proportion of debt and equity. For equity, the book

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