Question

FINA Company’s assets are $500 million, financed through bank loans, bonds, preferred stocks and common stocks. The amounts are as follows:

Bank loans: $ 100 million borrowed at 4%

Bonds: $200 million, paying 8% coupon with semi-annual payments, and maturity of 10 years. FINA sold its $1,000 par-value bonds for $960 and had to incur $40 floatation cost per bond.

Preferred Stocks: $50 million, paying $20 dividends per share. FINA sold its preferred shares for $205 and had to incur $5/share floatation cost.

Common Stocks: $150 million, the beta of FINA stocks is 2.2, the 90-day Treasury yield is 2%, return on the market portfolio is 12 %.

If FINA is subject to 30% tax rate, what is the WACC for FINA?

Answer 1

WACC = WdRd(1-t)+WpRp+WeRe

Where;

Wd = Weight of Debt

Rd = Rate of interest of Debt

Wp = Weight of preferred stock

Rp = Cost of preferred stock

We = Weight of Equity

Re = cost of equity

Total Capital = $ 500 million

Equity = $150 million

Debt = $300 million

Preferred stock = $50 million

Wd = 300/500 or 3/5

We = 150/500 or 1.5/5

Wp = 50/500 or 0.5/5

Debt is composed of Bank loan, 200 million of 8% bond, and 100 million of $1000 bond

Cost of debt fofr $1000 bond = 40/960 = 0.041667 or 4.17%

Cost of preferred stock = dividend cost/(market price - floatation cost) = (20)/(205-5) = 20/200 = 10%

Cost of equity thru capm method = 2% + 2.2*(12%-2%) = 24%

WACC = (3/5*2/3*0.08+3/5*1/3*0.0417) (1-0.3) + 0.5/5 * 0.10+ 1.5*0.24 = 0.028233+0.01 + 0.072 = 0.110233 or 11.23%