Let's break down the problem step by step: **Given:** - Cost of equity, \( R_e = 11.1\% \) - YTM on bonds (cost of debt before tax), \( R_d = 5.7\% \) - Tax rate, \( T = 22\% \) - Bonds sell for 93.1% of par (market value) - Book value of debt = \$393,000 - Book value of total assets = \$947,000 - Market-to-book ratio of assets = 2.59 We are to **find the WACC**. --- ## **Step 1: Calculate Market Value of Equity and Debt** ### **Market Value of Assets:** \[ \text{Market Value of Assets} = \text{Book Value of Assets} \times \text{Market-to-Book Ratio} \] \[ = \$947,000 \times 2.59 = \$2,452,730 \] ### **Market Value of Debt:** \[ \text{Market Value of Debt} = \text{Book Value of Debt} \times \frac{\text{Market Price}}{\text{Par}} \] \[ = \$393,000 \times 0.931 = \$365,583 \] ### **Market Value of Equity:** \[ \text{Market Value of Equity} = \text{Market Value of Assets} - \text{Market Value of Debt} \] \[ = \$2,452,730 - \$365,583 = \$2,087,147 \] --- ## **Step 2: Calculate Weights** \[ \text{Total Market Value} = \text{Market Value of Equity} + \text{Market Value of Debt} \] \[ = \$2,087,147 + \$365,583 = \$2,452,730 \] \[ w_E = \frac{2,087,147}{2,452,730} = 0.8515 \] \[ w_D = \frac{365,583}{2,452,730} = 0.1491 \] --- ## **Step 3: After-tax Cost of Debt** \[ \text{After-tax Cost of Debt} = R_d \times (1 - T) \] \[ = 5.7\% \times (1 - 0.22) = 5.7\% \times 0.78 = 4.446\% \] --- ## **Step 4: WACC Calculation** \[ \text{WACC} = w_E \times R_e + w_D \times R_d \times (1 - T) \] \[ = 0.8515 \times 0.111 + 0.1491 \times 0.057 \times 0.78 \] \[ = 0.09491 + 0.00663 \] \[ = 0.10154 \text{ or } 10.15\% \] --- ## **Final Answer** \[ \boxed{10.15\%} \] That's Upton Umbrellas' WACC, rounded to two decimal places.