WACC Exercise
Suppose the DHBK Company has this book value balance sheet:
Current assets
Fixed assets
30,000,000
50,000,000
Total assets
80,000,000
Current liabilities
10,000,000
Long-term debt
30,000,000
Common equity ($1 par)
Common stock
1,000,000
Retained earnings 39,000,000
Total claims
80,000,000
The current liabilities consist entirely of notes payable to banks, and the interest rate on
this debt is 10 percent, the same as the rate on new bank loans. The long-term debt
consists of 30,000 bonds, each of which has a par value of $1,000, carries an annual coupon
interest rate of 6 percent, and matures in 5 years. The current rate of interest on new longterm debt is 10 percent and this is the present yield to maturity on the firm’s bonds. The
common stock sells at a price of $60 per share. The tax rate is 35 percent. There is no
flotation cost.
a) Calculate TK’s market value capital structure.
b) If the firm’s beta is 1.8, the risk-free rate is 6.3 percent, and the expected return on the
market is 15 percent, what will be the DHBK’s weighted average cost of capital?