Business, 22.10.2020 19:01 Slycooper5959

Assume JUP has debt with a book value of million, trading at 120% of par value (hint: par value equals the book value of the debt). The bonds have a yield to maturity of . The firm has book equity of million, and 2 million shares trading at per share. The firm's cost of equity is What is JUP's WACC if the firm's marginal tax rate is %?

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Answer from: bryanmcmillianjr

The question is incomplete. The complete question is,

Assume JUP has debt with a book value of $20 million, trading at 120% of par value (hint: par value equals the book value of the debt). The bonds have a yield to maturity of 7%. The firm's book value of equity is $16 million, and it has 2 million shares trading at $19 per share. The firm's cost of equity is 12%. What is JUP's WACC if the firm's marginal tax rate is 35%?

WACC = 0.09116 or 9.116% rounded off to 9.12%

Explanation:

The WACC or Weighted average cost of capital is the cost of a firm's capital structure that can be made of one or all of the following components namely debt, preferred stock and common equity.

The formula to calculate is as follows,

WACC = wD * tD * (1- tax rate) + wP * rP + wE * rE

Where,

w represents the weight of each component in capital structure r represents the cost of each component D, P and E represents debt, preferred stock and Common Equity respectively.

As we don't have preferred stock so our WACC equation will be,

WACC = wD * tD * (1- tax rate) + wE * rE

We first need to determine the total value of capital structure and the market value of each component to determine the weight of each component.

Market value of debt = 20 * 120% = $24 million

Market value of equity = 2 * 19 = $38 million

Total value of capital structure = 24 + 38 = 62 million

WACC = 24/62 * 0.07 * (1 - 0.35) + 38/62 * 0.12

WACC = 0.09116 or 9.116% rounded off to 9.12%

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Answer from: Quest

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