Sapp Truckings balance sheet shows a total of noncallable 45

Sapp Trucking\'s balance sheet shows a total of non-callable $45 million long-term debt with a coupon rate of 7% and a yield to maturity of 6%. This debt currently has a market value of $50 million. The balance sheet also shows that the company has 10 million shares of common stock, and the book value of the common equity (common stock plus retained earnings) is $65 million. The current market value of equity (stock price) is $20 per share. Additionally, stockholders\' required return is 12.9%, and the firm\'s tax rate is 40%. What is the company\'s WACC based on market value weighting? Your answer should be between 9.72 and 12.50, rounded to 2 decimal places, with no special characters.

Solution

Market value of Debt = 45 million
Cost of debt = YTM = 6%
Market value of Equity = Market price of share * No of shares outstanding = 20 * 10 million = 200 million
Cost of equity = 12.9%
Total value = Debt + Equity = 45 + 200 = 245
WACC = Equity/ Total value * cost of equity + Debt/Total value * costs of debt * ( 1- tax rate) = 200/245 * 12.9% + 45/245 * 6% * ( 1- 40%) = 11.19%

Best of Luck. God Bless
Please Rate well