To calculate the Weighted Average Cost of Capital (WACC) for McCann Catching, Inc., we need to determine the costs of equity and debt, the weights of equity and debt in the firm's capital structure, and then use these components to calculate WACC.
Step 1: Calculate the Market Value of Equity
The market value of equity can be calculated as:
\[ \text{Market Value of Equity} = \text{Shares Outstanding} \times \text{Price per Share} \]
\[ \text{Market Value of Equity} = 2.00 \text{ million shares} \times 12.85 = 25.70 \text{ million} \]
Step 2: Calculate the Market Value of Debt
The market value of debt can be found using the quoted price of the debt relative to its face value:
\[ \text{Market Value of Debt} = \text{Face Value} \times \text{Quoted Price} \]
\[ \text{Market Value of Debt} = 13.00 \text{ million} \times 0.89 = 11.57 \text{ million} \]
Step 3: Calculate Total Value of the Firm
Total value of the firm (V) is the sum of the market value of equity and market value of debt:
\[ V = \text{Market Value of Equity} + \text{Market Value of Debt} \]
\[ V = 25.70 \text{ million} + 11.57 \text{ million} = 37.27 \text{ million} \]
Step 4: Calculate Weights of Equity and Debt
The weight of equity (E/V) and weight of debt (D/V) are:
\[ W_e = \frac{\text{Market Value of Equity}}{V} = \frac{25.70}{37.27} \approx 0.689 \]
\[ W_d = \frac{\text{Market Value of Debt}}{V} = \frac{11.57}{37.27} \approx 0.311 \]
Step 5: Calculate Cost of Equity
The cost of equity can be estimated using the Capital Asset Pricing Model (CAPM):
\[ r_e = r_f + \beta \times (r_m - r_f) \]
where:
- \( r_f \) = risk-free rate = 4.00%
- \( \beta \) = firm’s beta = 1.30
- \( r_m - r_f \) = market risk premium = 8.00%
Calculating the cost of equity:
\[ r_e = 0.04 + 1.30 \times 0.08 = 0.04 + 0.104 = 0.144 = 14.40% \]
Step 6: Calculate Cost of Debt
The cost of debt is the yield on the debt, adjusted for taxes:
\[ r_d = \text{Yield} = 8.00% \]
\[ \text{After-tax Cost of Debt} = r_d \times (1 - \text{Tax Rate}) = 0.08 \times (1 - 0.37) = 0.08 \times 0.63 = 0.0504 = 5.04% \]
Step 7: Calculate WACC
Now we can calculate WACC using the formula:
\[ WACC = W_e \times r_e + W_d \times \text{After-tax Cost of Debt} \]
Substituting in the values:
\[ WACC = 0.689 \times 0.144 + 0.311 \times 0.0504 \]
\[ WACC \approx 0.099318 + 0.015691 = 0.115009 \]
Final WACC Calculation
Thus, the Weighted Average Cost of Capital (WACC) for McCann Catching, Inc. is approximately:
\[ WACC \approx 11.50% \]