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Calculate wacc for companies

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Reference no: EM133057517

a. The following balance sheet and information are given for Pavone Company (VC):

Current Assets

$2,000,000

Current Liabilities

  $1,000,000

Short-term Securities

0

Long-term Liabilities(Bonds)

  $5,000,000

Long-term Assets

7,000.000

Equity

  $3,000,000

Total 

$9,000,000

Total

  $9,000,000

Additional information: The VC's bond has a face value of $1,000 and pays 10 percent semiannual coupon. The bond matures in 12 years and sells for $920 in the bond market. The beta of VC is 1.25, the market risk premium is 7.95 percent, and the risk-free rate is 2.50 percent. The VC's tax rate is 40%.

What is Pavone's WACC? 

b. The following information is given for Guida Company (GC):

  • Bond outstanding: 3,000 bonds, selling at $995 per bond.
  • Common stock outstanding: 260,000 shares, selling at $23.40 per share.
  • The before-tax cost of debt of the company is 12.31%, the beta of Guida is 1.40, the market risk premium is 7.95%, the tax rate is 40%, and the risk-free rate is 2.50%? What is Guida's WACC? 

Required: Calculate WACC for both companies. Please describe, in writing, how do you calculate WACCs in 5 lines?

Reference no: EM133057517

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