Assume JUP has debt with a book value of $20 million,trading at 120% of par value.The bonds have a yield to maturity of 6%.The firm has book equity of $20 million,and 2 million shares trading at $18 per share.The firm's cost of equity is 12%.What is JUP's WACC if the firm's marginal tax rate is 35%?
A)9.60%
B)8.76%
C)9.00%
D)6.24%
E)7.34%

Question

Quizplus · Accepted Answer

First, we need to calculate the market value of debt.

Market value of debt = $20 million * 1.20 = $24 million

Next, we need to calculate the total market value of the firm.

Total market value = $24 million + ($2 million * $18) = $60 million

Now, we can calculate the weight of debt and equity in the firm's capital structure.

Weight of debt = $24 million / $60 million = 0.4
Weight of equity = ($2 million * $18) / $60 million = 0.6

Next, we can calculate the after-tax cost of debt.

After-tax cost of debt = 6% * (1 - 0.35) = 3.9%

Finally, we can calculate the WACC.

WACC = (0.4 * 3.9%) + (0.6 * 12%) = 8.76%

Assume JUP Has Debt with a Book Value of $20