Any help in solving the following problem is welcomed -- web sites,
formulas, etc.


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.						

	Market			After tax	
	Value	Proportions	Cost	cost	WACC
Debt	FORMULA	#DIV/0!	         9% FORMULA FORMULA
Equity	FORMULA #DIV/0!	        15%	15% FORMULA
Total	$0 	#DIV/0!			        0.0%

Hi boobee,

The Weighted Average Cost of Capital is calculated using the formula
r* = rD (1-TC) D/V + rE (E/V) where r* is the weighted average cost of
capital, rD is the firm's current borrowing rate, TC is the firm's
marginal income tax rate, rE is the expected rate of return on the
firm's stock, D is the market value of the firm's debt, E is the
market value of the firm's equity, and V is the total market value of
the firm (D + E).

From the problem, we know that rE is 15% and TC is 40%.

D is determined by multiplying the par value of $5 million by the 110%
premium currently prevailing in the market, which equals $5,500,000.

rD is determined by dividing the yield to maturity on the bonds of 9%
by the 110% premium currently prevailing in the market, which equals
8.18%.

E is determined by dividing the firm's book value of the equity by the
book value per share and then multiplying the result by the price per
share.  $10 million book value/$20 book value per share = 500,000
shares outstanding.  500,000 shares*$30 per share = $15 million.

V is determined by adding D and E, which equals $20,500,000.

Plugging the above values into the Weighted Average Cost of Capital
formula given above results in an r* of 12.29%.

Sincerely,

Wonko

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Request for Answer Clarification by boobee-ga on 03 Jul 2003 13:55 PDT

H Wonko-ga,

Just wanted to confirm that this is what the correct figures are -- it
prints out a little crazy.

 Market			After tax	
 Value	  Proportions	Cost	cost	WACC
$5,500,000 	27%	9%	40%	8.2%
 15,000,000 	73%	15%	15%	4.1%
$20,500,000 	100%			12.3%

thanks

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Clarification of Answer by wonko-ga on 03 Jul 2003 15:08 PDT

Actually, the weighted cost of capital is 1.3% for the debt and 11%
for the equity for a total of 12.3%.  You can calculate this yourself
using the two halves of the formula for r* (the + divides it between
the debt portion and the equity portion).

Thanks!

Wonko

Thanks again -- five gold stars!!!