Question

The current stock price for a company is $50 per share, and there are 7 million shares outstanding. The beta for this firms stock is 1.2, the risk-free rate is 4.7, and the expected market risk premium is 5.6%. This firm also has 200,000 bonds outstanding, which pay interest semiannually. These bonds have a coupon interest rate of 7%, 16 years to maturity, a face value of $1,000, and a current price of 1,035.54. If the corporate tax rate is 37%, 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

Value of debt = 200000*1035.54 = 207108000

Value of equity = 50*7000000 = 350000000

Total value = 207108000 + 350000000 = 557108000

Cost of debt:

PV = 1035.54

FV = 1000

N = 16*2 = 32

PMT = 7%/2*1000 = 35

Using fincancial calculator, I/Y = 3.318%

Annual YTM = 3.318%*2 = 6.64%

Cost of equity:

Cosst of equity = Risk free rate + beta*Risk premium = 4.7%+1.2*5.6% = 11.42%

WACC = rD (1- Tc )*( D / V )+ rE *( E / V )

Where...

rD = The required return of the firm's Debt financing

(1-Tc) = The Tax adjustment for interest expense

(D/V) = (Debt/Total Value)

rE= the firm's cost of equity

(E/V) = (Equity/Total Value)

WACC = 207108000/557108000 * 6.64%*(1-0.37) + 350000000/557108000*11.42% = 8.73%

WACC = 8.73% = 0.0873

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