Sangria is a US-based company whose products aim to promote happy, low-stress lifestyles. Let's calculate the WACC of Sangria. Its accounting and market value balances are:

Value in books

Asset value = 1000

Debt value = 500

equity value = 500

Market value

1250 asset value

500 debt

750 equity

We calculate the market value of equity on Sangria's balance sheet by multiplying its current share price ($7.50) by 100 million, the number of shares outstanding. The company's future prospects are good, so the shares are trading above book value ($7.50 vs. $5.00 per share). However, interest rates have been stable since the company's debt was issued, and in this case, the book and market values of the debt are the same.

Sangria's cost of debt (the market interest rate on its existing debt and any new loans) is 6%. Its cost of capital (the expected rate of return required by investors in Sangria shares) is 12.4%.

The market value balance sheet shows assets worth $1.25 billion. Of course, we cannot observe this value directly, because the assets themselves are not traded. But we know what they're worth to debt and equity investors ($500 + 750 = $1.25 billion). This value is entered to the left of the market value balance.

Indentation is consistently profitable and is taxed at a marginal rate of 35%.

Asset value = 1000

Debt value = 500

equity value = 500

 What is Sangria's after-tax WACC?

Answer rating: 100% (QA)

To calculate the weighted average cost of capital WACC for Sangria we need to calculate the co... View the full answer