Question

Calculate the WACC based on the following information. Assume tax rate is 35%. Debt: $10M face...

Calculate the WACC based on the following information. Assume tax rate is 35%. Debt: $10M face value, current price $10.8M, 6.4% coupon rate, 25 years to maturity, semiannual coupon payment. (Hint: cost of debt is YTM of the bond) Equity: 495,000 shares outstanding, market price $63, beta 1.15. Market: MRP 7%, 3.2% risk free rate

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Answer #1

Calculating YTM of the bond:

Number of periods = 25*2 =50

PMT = 6.4%/2 * 10 = 0.32 million

PV = 10.8 million

FV = 10 million

Using "RATE" function in excel:

YTM =RATE(50,0.32,-10.8,10)*2 = 5.79%

WACC = Wd*Kd*(1-t) + We*Ke

WACC uses market value of debt and equity

Market value of debt = $10.8 million

Market value of equity = 495000*63 = 31.185 million

Ke = risk free rate + Beta*market risk premium = 3.2%+ 1.15*7% = 11.25%

WACC = 10.8/(10.8+31.185)*5.79%*(1-0.35) + 31.185/(10.8+31.185)*11.25% = 9.32%

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