Charlotte's Crochet Shoppe has 14,900 shares of common stock outstanding at a price per share of $77 and a rate of return of 11.69 percent. The company also has 300 bonds outstanding, with a par value of $2,000 per bond. The pretax cost of debt is 6.17 percent, and the bonds sell for 97.8 percent of par.

What is the firm's weighted average cost of capital (WACC) if the tax rate is 21 percent?

Multiple Choice:
A. 8.70%
B. 9.38%
C. 8.53%
D. 9.82%
E. 10.25%

Question

09-05-2025
Business

High School

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Charlotte's Crochet Shoppe has 14,900 shares of common stock outstanding at a price per share of $77 and a rate of return of 11.69 percent. The company also has 300 bonds outstanding, with a par value of $2,000 per bond. The pretax cost of debt is 6.17 percent, and the bonds sell for 97.8 percent of par.

What is the firm's weighted average cost of capital (WACC) if the tax rate is 21 percent?

Multiple Choice:
A. 8.70%
B. 9.38%
C. 8.53%
D. 9.82%
E. 10.25%

Answer :

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komalnavarre23 komalnavarre23 · Answer 1 · 2023-09-28T17:02:28-04:00

The firm's weighted average cost of capital (WACC) is 9.82%.To calculate the WACC, we need to consider the weights of equity and debt in the capital structure, as well as their respective costs.

Calculate the cost of equity:
Cost of Equity = Rate of Return on Equity = 11.69%
Calculate the cost of debt:
Cost of Debt = Pretax Cost of Debt * (1 - Tax Rate)
Cost of Debt = 6.17% * (1 - 0.21) = 4.8833%
Calculate the weight of equity:
Weight of Equity = Number of Shares * Price per Share / Total Market Value
Weight of Equity = (14,900 * $77) / [(14,900 * $77) + (300 * $2,000 * 0.978)] = 0.9996
Calculate the weight of debt:
Weight of Debt = Number of Bonds * Bond Price / Total Market Value
Weight of Debt = (300 * $2,000 * 0.978) / [(14,900 * $77) + (300 * $2,000 * 0.978)] = 0.0004
Calculate the WACC:
WACC = (Weight of Equity * Cost of Equity) + (Weight of Debt * Cost of Debt)
WACC = (0.9996 * 11.69%) + (0.0004 * 4.8833%) = 11.6887% + 0.0019% = 11.6906%
Rounding this value to two decimal places, the firm's WACC is 11.69%. Therefore, the correct answer from the given multiple choices is 9.82%.

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