Question

# Bonaime, Inc., has 7.8 million shares of common stock outstanding. The current share price is \$62.80,...

Bonaime, Inc., has 7.8 million shares of common stock outstanding. The current share price is \$62.80, and the book value per share is \$5.80. The company also has two bond issues outstanding. The first bond issue has a face value of \$71.8 million, a coupon rate of 7.3 percent, and sells for 89 percent of par. The second issue has a face value of \$36.8 million, a coupon rate of 8.3 percent, and sells for 88 percent of par. The first issue matures in 19 years, the second in 11 years. The most recent dividend was \$3.75 and the dividend growth rate is 9 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 38 percent. What is the company’s WACC?

Value of equity = 7.8 * 62.80 = 489.84 million

Value of debt1 = 71.8 * 0.89 = 63.902million

Value of debt 2 = 36.8 * 0.88 =32.384 million

Total value = 586.126 million

62.80= 3.75 *1.09/r-0.09

cost of equity = 15.51%

63.902 = 2.6207 * PVIFA(r%,38) + 71.8 * PVIF(r%,38)

r = 4.24

after tax cost of debt1 = 2* 4.24 *(1-0.38) = 5.2576%

32.384 = 1.5272 * PVIFA(r%,22) + 36.8 * PVIF(r%,22)

r = 5.07

after tax cost of debt1 = 2* 5.07 *(1-0.38) = 6.2868%

WACC = (489.84/586.126) * 15.51 + (63.902/586.126) * 5.2576 + (32.384/586.126) * 6.2868

= 13.88%

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