Question

A company has $96 million in outstanding bonds, and 10 million shares of stock currently trading at $34 per share.The bonds pay an annual coupon rate of 8% and is trading at par. The company's beta is 1, its tax rate is 40%, the risk-free rate is 3%, and the market risk premium is 4%. What is this firm's WACC? Enter your answer as a percentage, without the percentage sign ('%'), rounded to 1 decimal. For example, if your answer is 0.0789, that's 7.9%, so just enter 7.9

Answer 1

WACC is weighted Avg cost of sources in capital structure

Ke = Rf + Beta ( Market risk Premium )

= 3% + 1 ( 4% )

= 3% +4%

= 7%

Kd = YTM

Where bond is trading at par, YTM and coupon rates are same

thus YTM is 8%

After Tax cost of Debt = YTM ( 1 - Tax rate )

= 8% * ( 1 - 0.4 )

= 8% * 0.6

= 4.8%

WACC:

Source	Qty	Price	Value ( in M)	Weight	Cost	WTd Cost
Debt	96	$      1.00	$   96.00	0.220183	4.80%	0.0106
Equity	10	$   34.00	$ 340.00	0.779817	7.00%	0.0546
WACC						0.0652

WACC is 6.52%