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Charlotte's Crochet Shoppe has 17,000 shares of common stock outstanding at a price per share of $84 and a rate of return of 9.7 percent. The company also has 370 bonds outstanding, with a par value of $2,000 per bond. The pretax cost of debt is 6.31 percent, and the bonds sell for 99.9 percent of par. What is the firm's WACC if the tax rate is 24 percent?

1. 9.52%
2. 9.19%
3. 10.04%
4. 10.48%
5. 9.02%

Answer :

The firm's WACC is approximately 0.550251, which is equivalent to 5.03%. The answer is not mentioned in the options

To calculate the weighted average cost of capital (WACC) for Charlotte's Crochet Shoppe, we need to consider the cost of equity and the cost of debt.

First, let's calculate the cost of equity. The formula for the cost of equity is:

Cost of Equity = Rate of Return * Price per Share

Given that the rate of return is 0.97 (or 97%) and the price per share is $84, we can calculate the cost of equity:

Cost of Equity = 0.97 * $84

= $81.48

Next, let's calculate the cost of debt. The formula for the cost of debt is:

Cost of Debt = Pretax Cost of Debt * (1 - Tax Rate)

Given that the pretax cost of debt is 6.31% and the tax rate is 24%, we can calculate the cost of debt:

Cost of Debt = 6.31% * (1 - 24%)

= 6.31% * 0.76

= 4.7936%

Now, let's calculate the weight of equity and the weight of debt. The weight of equity is the proportion of equity financing, and the weight of debt is the proportion of debt financing. The formulas for these are:

Weight of Equity = Number of Shares * Price per Share / Total Market Value
Weight of Debt = Number of Bonds * Par Value per Bond / Total Market Value

Given that there are 17,000 shares of common stock outstanding, a price per share of $84, 370 bonds outstanding, and a par value of $2,000 per bond, we can calculate the weights:

Weight of Equity = (17,000 * $84) / $2,168,000

= 0.6632


Weight of Debt = (370 * $2,000) / $2,168,000

= 0.3368

Finally, we can calculate the WACC using the following formula:

WACC = (Weight of Equity * Cost of Equity) + (Weight of Debt * Cost of Debt)

WACC = (0.6632 * 0.8148) + (0.3368 * 0.047936)

= 0.534099 + 0.016152

= 0.550251

Therefore, the firm's WACC is approximately 0.550251, which is equivalent to 5.03%.

The firm's WACC is 5.03%.

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