The Wishing Well hotel chain has a short-term bank loan with a book value of $40million and has issued bonds with a book value of $200 million. The book value of the firm’s equity (net worth) is equal to $400 million. The interest rate the firm pays on the bank debt equals 8% and the yield on the bonds equals 10%. Wishing Well has 10 million shares outstanding at a price of $90 per share. The current required return on equity is 18%. If we assume that the marginal tax rate for Wishing Well equals 35%, what is Wishing Well’s WACC? Motivate your approach and show your calculations (hint: since the firm has two different types of debt outstanding, you can calculate the weighted average of the cost of debt first before using the WACC formula).
The question belongs to Finance and it discusses about calculation of weighted average cost of capital.
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