Skolits Corporation has a cost of equity of 11.1% and an aftertax cost of debt of 4.23%. The company's balance sheet lists long-term debt of 305,000 and equity of 565,000. The company's bonds sell for 95.3% of par and the market -to-book ratio is 2.59 times. if the company's tax rate is 22%, what is the WACC?

Given the book value of equity is $565,000 and the market-to-book ratio is 2.59:

$$E = \text{Book Value of Equity} \times \text{Market-to-Book Ratio} = 565,000 \times 2.59 = 1,465,350$$

The bonds sell for 95.3% of par. Assuming the par value of the debt is $305,000:

$$D = \text{Book Value of Debt} \times \text{Selling Price Percentage} = 305,000 \times 0.953 = 290,615$$

Now we can substitute the values into the WACC formula:

• $r_e = 11.1\% = 0.111$
• $r_d = 4.23\% = 0.0423$
• $T = 22\% = 0.22$

$$\text{WACC} = \left( \frac{1,465,350}{1,755,965} \times 0.111 \right) + \left( \frac{290,615}{1,755,965} \times 0.0423 \times (1 - 0.22) \right)$$

Calculating each component:

1. Equity portion:

$$\frac{1,465,350}{1,755,965} \times 0.111 \approx 0.0906$$

2. Debt portion:

$$\frac{290,615}{1,755,965} \times 0.0423 \times 0.78 \approx 0.0065$$

Final WACC Calculation:

$$\text{WACC} \approx 0.0906 + 0.0065 \approx 0.0971 \text{ or } 9.71\%$$

Thus, the WACC for Skolits Corporation is approximately 9.71%.