Question

Caspian Sea Drinks' is financed with 69.00% equity and the remainder in debt. They have 11.00-year, semi-annual pay, 5.17% coupon bonds which sell for 98.38% of par. Their stock currently has a market value of $25.00 and Mr. Bensen believes the market estimates that dividends will grow at 3.90% forever. Next year’s dividend is projected to be $2.01. Assuming a marginal tax rate of 22.00%, what is their WACC (weighted average cost of capital)?

Answer 1

Particulars	Formula	Amount
Next year dividend (D1)		2.01
Stock price (P0)		25.0
Growth rate (g)		3.9%
Cost of equity (Ke)	=(D1/P0)+g	11.94%

Type	Weights (A)	Cost of capital (net of tax) (B)	Weighted average cost of capital (A) * (B)
Equity	0.69	11.94%	8.24%
Debt	0.31	4.69%	1.45%
			9.69%

Hence, WACC is 9.69%.