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a. The following balance sheet and information are given for Carboni Company(CC): Current Assets $2,000,000 Current Liabilities $1,000,000 Short-term Securities 0 Long-term Liabilities (Bonds) $5,000,000

a. The following balance sheet and information are given for Carboni Company(CC):

Current Assets

$2,000,000

Current Liabilities

$1,000,000

Short-term Securities

0

Long-term Liabilities

(Bonds)

$5,000,000

Long-term Assets

7,000.000

Equity

$3,000,000

Total

$9,000,000

Total

$9,000,000

Additional information: The CCs bond has a face value of $1,000 and pays 10 percent semiannual coupon. The bond matures in 12 years and sells at a price of $920 in the bond market. The beta of CC is 1.25, market risk premium is 7.95 percent and risk free rate is 2.50 percent. The CCs tax rate is 40%.

What is Carbonis WACC?

b. The following information is given for Guatelli Company(GC):

Bond outstanding: 3,000 bonds, selling at $995 per bond.

Common stock outstanding: 260,000 shares, selling at $23.40 per share.

The before-tax cost of debt of the company is 12.31%, beta of Guatelli is 1.40, market risk premium is 7.95%, tax rate 40%, and risk free rate is 2.50%? What is Guatellis WACC?

Required: Calculate WACC for both companies. Please describe, in writing, how you calculate WACCs in 6 lines.

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