Question

A company Star gives you the following data. Compute WACC.

STOCK: nominal value 25 USD, market value 40 USD, dividend at the beginning of the year 5 USD, growth rate 2%, a company issued 20,000 pieces of stock.

BONDS: nominal value 50 USD, market value 40 USD, interest rate 10%, the company issued 5,000 pieces, number of years to maturity 11. Tax rate 20%.

Answer 1

Answer: WACC = 13.40 %.

Explanation:

Capital Structure using market values

STOCK	(20,000 * $40) = $800,000	($800,000 / $1,000,000) = 80 %
BONDS	(5,000 * $40) = $200,000	($200,000 / $1,000,000) = 20 %
	$1,000,000

Cost bonds = Interest rate (1 - tax rate) = 10 * (1 - 0.2) = 8 %

Cost of stock = (Expected dividend in 1 year / Stock price per stock) + growth rate

Expected dividend in 1 year = Beginning dividend (1 + growth rate) = $5 (1 + 0.02) = $5.10

Cost of stock = ($5.10 / $40) + 0.02 = 14.75 %

WACC = (Cost of stock * 80 %) + (Cost bonds * 20 %)

= (0.1475 * 80 %) + (0.08 * 20 %) = 0.118 + 0.016 = 13.40 %.