Bolster Foods’ (BF) balance sheet shows a total of $25 million long-term debt with a coupon rate of 8.50%. The yield to maturity on this debt is 8.00%, and the debt has a total current market value of $27 million. The balance sheet also shows that the company has 10 million shares of stock, and the stock has a book value per share of $5.00. The current stock price is $20.00 per share, and stockholders' required rate of return, rs, is 12.25%. The company recently decided that its target capital structure should have 35% debt, with the balance being common equity. The tax rate is 40%. Calculate WACCs based on book, market, and target capital structures. What is the sum of these three WACCs?

The sum of these three WACCs is 30.77%.

Based on the information given, the book value will be calculated as:

= $25 million + ($10 million × $5.00)

= $25 million + $50 million

= $75 million

The first WACC will be:

= (25 / 75 × 4.8%) + (50/ 75 × 12.25%)

= 9.77%

The second WACC will be:

= (27 / 227 × 4.8%) +( 200 / 227 × 12.25%)

= 11.36%

The third WACC will be:

= (0.35 × 4.8%) + (0.65 × 12.25%)

= 9.64%

Therefore, the sum of these three WACCs will be:

= 9.77% + 11.36% + 9.64% = 30.77%

In conclusion, the correct option is 30.77%.

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Sum of these three WACCs = 30.77%

Explanation:

As per the data given in the question,

We need to do following calculations which are shown below:

Cost of debt =Yield to maturity × (1 - tax rate)

=8% × (1 - 0.40)

= 4.8%

And, the required rate of return is  12.25%

To calculate Book value :

Total value = $25 million +$10 million × $5.00

= $75 million

WACC = (Debt ÷ total value ) × cost of debt + (Equity total value ÷ total value ) × cost of debt

= 25 ÷ 75 × 4.8% + 50 ÷ 75 × 12.25%

= 9.77%

To calculate Market value :

Total value = $27 million + 10 million × $20.00

= $227 million

WACC = 27 ÷ 227 × 4.8% + 200 ÷ 227 × 12.25%

= 11.36%

Now Target capital structure :

Weight of debt = 0.35

Weight of equity = 1 - 0.35 = 0.65

WACC = 0.35 × 4.8% + 0.65 × 12.25%

= 9.64%

Sum of these three WACCs

= 9.77% + 11.36% + 9.64%

= 30.77%

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