Question

Determine the Weighted Average Cost of Capital (WACC) for a firm with the following capital structure

39,000 41.0%cpn bond due 2/1/2019 priced @101.009

47,000 5.05%cpn bonds due 2/1/2042 Priced @102.847

37,000 4.75% ptd's priced @91.15/shr

6,410,000.00 common shares priced @41.60/shr

**Additional Market Data**

Beta = .95

US T-Bill = 1.05%

Exp. Ret MKt = 10.90%

Tax Rate = 36.40%

Answer #1

Calculation of Cost of Equity | |

Ke | Rf+beta*(Rm-Rf) |

1.05%+0.95*(10.90%-1.05%) | |

0.1041 | |

10.41% | |

Cost of Debt after tax | |

41% coupon rated | 41%*(100%-36.4%) |

0.2608 | |

26.08% | |

5.05% coupon bond | 5.05%*(100%-36.4%) |

0.0321 | |

3.21% |

Weighted Average Cost of Capital

Particulars | Cost | Total Value | Proportion | Weighted Average cost of capital |

41% Coupon bond | 26.08% | 3939351 | 1.412958 | 0.37 |

5.05% coupon bond | 3.21% | 4833809 | 1.7337803 | 0.06 |

4.75% Preference capital | 4.75% | 3372550 | 1.209659 | 0.06 |

Common Stock | 10.41% | 266656000 | 95.643603 | 9.96 |

278801710 | 10.44 | |||

Hence WACC | 10.44% |

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