Question

The current stock price for a company is $41 per share, and there are 8 million shares outstanding. The beta for this firms stock is 1.4, the risk-free rate is 4.4, and the expected market risk premium is 5.6%. This firm also has 170,000 bonds outstanding, which pay interest semiannually. These bonds have a coupon interest rate of 8%, 24 years to maturity, a face value of $1,000, and a current price of 1,059.68. If the corporate tax rate is 36%, what is the Weighted Average Cost of Capital (WACC) for this firm? (Answer to the nearest hundredth of a percent, but do not use a percent sign).

Answer 1

Risk free rate = 4.4%

Beta = 1.4

Equity required rate = 4.4% + 1.4 * (5.6%)

Equity required rate = 12.24%

Equity value = 41 * 8,000,000

Equity value = 328,000,000

PV = -1,059.68

FV = 1,000

N = 24 * 2 = 48

PMT = 8% * 1,000 * 0.5

PMT = 40

Using Financial calculator:

I = 3.730970%

Yearly rate = 3.730970 * 2

Yearly rate = 7.46%

Value of Bonds = 170,000 * 1,059.68

Value of Bonds = 180,145,600

Value of firm = 328,000,000 + 180,145,600

Value of firm = 508,145,600

Weight of Equity = 328,000,000/ 508,145,600

Weight of Equity = 64.548%

Weight of Debt = 1 - 64.548% = 35.452%

WACC = 64.548% * 12.24% + 35.452% * 7.46% * (1 - 36%)

WACC = 9.59