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?

Question

Asked on April 24, 2026Finance

This finance problem is solved step by step below, with detailed explanations to help you understand the method and arrive at the correct answer.

Accepted Answer · 2026-04-24T15:47:18.273Z

To calculate the Weighted Average Cost of Capital (WACC), we can use the following formula: \[ WACC = ( (E)/(V) × r_e ) + ( (D)/(V) × r_d × (1 - T) ) \] 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: \[ E = Book Value of Equity × Market-to-Book Ratio = 565,000 × 2.59 = 1,465,350 \] 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: \[ D = Book Value of Debt × Selling Price Percentage = 305,000 × 0.953 = 290,615 \] 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: \( r_e = 11.1\% = 0.111 \) \( r_d = 4.23\% = 0.0423 \) \( T = 22\% = 0.22 \) \[ WACC = ( (1,465,350)/(1,755,965) × 0.111 ) + ( (290,615)/(1,755,965) × 0.0423 × (1 - 0.22) ) \] Calculating each component: 1. Equity portion: \[ (1,465,350)/(1,755,965) × 0.111 ≈ 0.0906 \] 2. Debt portion: \[ (290,615)/(1,755,965) × 0.0423 × 0.78 ≈ 0.0065 \] Final WACC Calculation: \[ WACC ≈ 0.0906 + 0.0065 ≈ 0.0971 or 9.71\% \] Thus, the WACC for Skolits Corporation is approximately 9.71%.

Accepted Answer · 2026-04-24T15:47:18.273Z

To calculate the Weighted Average Cost of Capital (WACC), we can use the following formula: \[ WACC = ( (E)/(V) × r_e ) + ( (D)/(V) × r_d × (1 - T) ) \] 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: \[ E = Book Value of Equity × Market-to-Book Ratio = 565,000 × 2.59 = 1,465,350 \] 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: \[ D = Book Value of Debt × Selling Price Percentage = 305,000 × 0.953 = 290,615 \] 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: \( r_e = 11.1\% = 0.111 \) \( r_d = 4.23\% = 0.0423 \) \( T = 22\% = 0.22 \) \[ WACC = ( (1,465,350)/(1,755,965) × 0.111 ) + ( (290,615)/(1,755,965) × 0.0423 × (1 - 0.22) ) \] Calculating each component: 1. Equity portion: \[ (1,465,350)/(1,755,965) × 0.111 ≈ 0.0906 \] 2. Debt portion: \[ (290,615)/(1,755,965) × 0.0423 × 0.78 ≈ 0.0065 \] Final WACC Calculation: \[ WACC ≈ 0.0906 + 0.0065 ≈ 0.0971 or 9.71\% \] Thus, the WACC for Skolits Corporation is approximately 9.71%.

Step 1: Calculate Market Value of Equity (E)

Step 2: Calculate Market Value of Debt (D)

Step 3: Calculate Total Market Value (V)

Step 4: Calculate WACC

Final WACC Calculation:

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