Let's go over one example on how to calculate WACC. Please provide your solutions for the following example.
The following financial statement data pertains to Southwater, Inc., a manufacturer of women's suits (dollar amounts in millions):
Total Assets $154,287
Interest-Bearing Debt $33,984
Average Pre-tax borrowing cost 7.75%
Common Equity:
Book Value $21,365
Market Value $66,735
Income Tax Rate 39.6%
Market Equity Beta 0.77
Market Premium 7.45%
Risk-free interest rate 2.5%
Required:
a. Calculate the company's cost of equity capital.
b. Calculate the weight on debt capital that should be used to determine Southwater's weighted-average cost of capital.
c. Calculate the weight on equity capital that should be used to determine Southwater's weighted-average cost of capital.
d. Calculate Southwater's weighted-average cost of capital.