Question

BHC Mining Corporation has 3 million shares of common stock outstanding and 90,000 9 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $40 per share and has a beta of 1.1; the bonds have a yield to maturity of 7% and sell for 105 percent of par. The market risk premium is 12 percent, T-bills are yielding 2 percent, and the company’s tax rate is 34 percent. What is the company's WACC?

Group of answer choices:

A) 10.54%

B) 11.12%

C) 9.31%

Answer 1

Market value of shares = 3,000,000 * 40 = 120,000,000

Market value of bonds = 90000 (105% of 1000) = 94,500,000

Total market value = 120,000,000 + 94,500,000 = 214,500,000

Cost of equity = Risk free rate + beta(market risk premium)

Cost of equity = 2% + 1.1(12%)

Cost of equity = 2% + 13.2%

Cost of equity = 15.2%

WACC = Weights * costs

WACC = (120,000,000 / 214,500,000)*0.152 + (94,500,000 / 214,500,000)*0.07*(1 - 0.34)

WACC = 0.085035 + 0.020354

WACC = 0.1054 or 10.54%