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?

To calculate the Weighted Average Cost of Capital (WACC), we can use the following formula: \[ \text{WACC} = \left( \frac{E}{V} \times r_e \right) + \left( \frac{D}{V} \times r_d \times (1 - T) \right) \] Where: \( E \) = market value of equity \( D \) = market value of debt \( V \) = total market value of the firm (E + D) \( r_e \) = cost of equity \( r_d \) = cost of debt \( T \) = tax rate Step 1: Calculate Market Value of Equity (E) Given the book value of equity is $565,000 and the market-to-book ratio is 2.59: \[ E = \text{Book Value of Equity} \times \text{Market-to-Book Ratio} = 565,000 \times 2.59 = 1,465,350 \] Step 2: Calculate Market Value of Debt (D) The bonds sell for 95.3% of par. Assuming the par value of the debt is $305,000: \[ D = \text{Book Value of Debt} \times \text{Selling Price Percentage} = 305,000 \times 0.953 = 290,615 \] Step 3: Calculate Total Market Value (V) \[ V = E + D = 1,465,350 + 290,615 = 1,755,965 \] Step 4: Calculate WACC 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%.