Question

15. Bell Media has common stock trading at a price of $74, and a market capitalization of $23 billion. The firm also has preferred stock worth a total of $6 billion, currently trading at $54 per share and paying a dividend of $4.50 per share. The firm's beta is 1.2, the risk-free rate is 2.4%, and the market risk premium is 6%. The firm has $28 billion of debt outstanding. Its bonds with the face value of $10,000 and semi-annual 5% coupons currently have 5 years to maturity and trade at $8783.37. If the firm's tax rate is 30%, what is Bell's WACC?

Answer 1

Cost of common equity = Rf + beta * market risk premium
= 2.4% + 1.2 * 6%
= 2.4% + 7.2%
= 9.6%

Cost of preferred shares = Annual dividednd / Stock price
= $4.50 / $54
= 8.33%

After tax Cost of debt can be calculated by using the following excel formula:
=RATE(nper,pmt,pv,fv)*2*(1-tax rate)
=RATE(5*2,10000*5%/2,-8783.37,10000)*2*(1-0.30)
= 5.60%

The total market value of the company = 23 billion + 6 billion + 28 billion = $57 billion

WACC = (weight of debt * cost of debt) + (weight of preferred stock * cost of preferred stock) + (weight of common equity * cost of common equity)
= (28/57 * 5.60%) + (6/57 * 8.33%) + (23/57 * 9.6%)
= 2.75% + 0.88% + 3.87%
= 7.50%

WACC = 7.50%