Total Calculate Wishing Well's WACC. Assume that the book and market values of Wishing Well's debt are the same. The marginal tax rate is 21% Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place. Weighted-average cost of capital 11.7 %
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
Manshukh
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The table below shows a book balance sheet for the Wishing Well Motel chain. The company's long-term debt is secured by
its real estate assets, but it also uses short-term bank loans as a permanent source of financing. It pays 11% interest on the
bank debt and 9% interest on the secured debt. Wishing Well has 10 million shares of stock outstanding, trading at $80 per
share. The expected return on Wishing Well's common stock is 19%. (Table figures in $ millions.)
Cash and marketable securities
Accounts receivable
Inventory.
Current assets
Real estate
Other assets
Total
$80
150
50
$ 280
1,700
140
$ 2,120
Bank loan
Accounts payable
Current liabilities
11.7%
Long-term debt
Equity
Total
$ 250
120
$ 370
1,550
200
$ 2,120
Calculate Wishing Well's WACC. Assume that the book and market values of Wishing Well's debt are the same. The marginal
tax rate is 21%
Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.
Weighted-average cost of capital](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fb2ee9549-8b17-4a80-a2e9-78a28be22b39%2Fc1230e53-91f4-4df3-abb1-a4e5a266f880%2Fuc0h7z_processed.jpeg&w=3840&q=75)
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