Question
William Tell Computers has a book value of the firm's equity that totals $10 million, with book value per share of $20. The stock sells
William Tell Computers has a book value of the firm's equity that totals $10 million, with book value per share of $20. The stock sells for a price of $30 per share. The firm's bonds have a face value of $5 million and sell at a price of 110% of face value. The yield to maturity on the bonds is 9%, and the firm's tax rate is 40%. The firm pays a constant dividend today of $4.50 that is not expected to change. We are interested in calculating the weighted-average cost of capital (WACC).
What are the respective weights of equity and debt in the capital structure?
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