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12. A company’s current share price is $11 and it has one million shares outstanding. It also has 10,000 non-callable $1,000 par value, 20-years until maturity, 7% coupon bonds with semi-annual payments currently selling for $1,100. The stock’s beta is 1.5 and the risk-free rate is 3%. The expected return on the market is 10%. The firm’s marginal tax rate is 25%. What is the best estimate for the weight of equity to use in calculating the WACC?

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Answer:

                                                                             $

Market value of equity = 1,000,000 x $11 = 11,000,000

Market value of debt   = 10,000 x  $1100  = 11,000,000

Market value of the firm                                22,000,000

The best estimate of the weight of equity in calculating WACC = $11,000,000/$22,000,000 x 100 = 50%

Explanation:

In this case, we need to obtain the market value of the company. Thereafter, we will divide the market value of equity by the market value of the company.

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