Calculating Sangria's WACC

Sangria is a U.S.-based company whose products aim to promote happy, low-stress lifestyles. Let's calculate Sangria's WACC. Its book and market value balance sheets are:

Book value

Asset value =1000

Debt value =500

equity value=500

Market value

1250 asset value

500 debt

750 equity

We calculated the market value of equity on Sangria's balance sheet by multiplying its current stock price ($7.50) by 100 million, the number of its outstanding shares. The company's future prospects are good, so the stock is trading above book value ($7.50 vs. $5.00 per share). However, interest rates have been stable since the firm's debt was issued and the book and market values of debt are in this case equal.

Sangria's cost of debt (the market interest rate on its existing debt and on any new borrowing) is 6%. Its cost of equity (the expected rate of return demanded by investors in Sangria's stock) is 12.4%.

The market-value balance sheet shows assets worth $1,250 million. Of course, we can't observe this value directly, because the assets themselves are not traded. But we know what they are worth to debt and equity investors ($500 + 750 = $1,250 million). This value is entered on the left of the market-value balance sheet.

Sangria is consistently profitable and pays taxes at the marginal rate of 35%.

Asset value =1000

Debt value =500

equity value=500

Question 1: What is Sangria's after-tax WACC?