Question

To estimate the company's WACC, B&H inc. recently hired you as a consultant. You have obtained the following information. (1) The firm's noncallable bonds mature in 15 years, have a 7.50% annual coupon, a par value of $1,000, and a market price of $1,110.00. (2) The company's tax rate is 34%. (3) The risk-free rate is 3.60%, the market return is 10.50%, and the stock's beta is 1.10. (4) The target capital structure consists of 45% debt and the balance is common equity. The firm uses the CAPM to estimate the cost of common stock, and it does not expect to issue any new shares. What is its WACC? Show your work in details.can you please show the WACC formula. Thank you

Answer #1

First of all lets find YTM

YTM = interest +(Face value-selling price/n)/(Face value+selling price/2)

=1000*7.5% + (1000-1110)/15 / (1000+1110)/2

=75 + (-10/15) / 2110/2

=75-0.6667/ 1055

=74.3333/1055

=7.0458%

After tax cost of debt = 7.0458%(1-t)

=7.0458%(1-0.34)

=7.0458%(0.66)

=4.65%

Now lets calculate cost of equity

According to CAPM

Ke = Rf+b(Rm-Rf)

=3.6%+1.1(10.5%-3.6%)

=3.6% + 1.1(6.9%)

=3.6%+7.59%

=11.19%

Statement showing WACC

Source of capital | Weight | K | WACC=weight*K |

equity | 55% | 11.19% | 6.155% |

debt | 45% | 4.65% | 2.093% |

8.247% |

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