Question

Caspian Sea Drinks' is financed with 66.00% equity and the remainder in debt. They have 11.00-year, semi-annual pay, 5.42% coupon bonds which sell for 98.93% of par. Their stock currently has a market value of $25.30 and Mr. Bensen believes the market estimates that dividends will grow at 3.62% forever. Next year’s dividend is projected to be $2.82. Assuming a marginal tax rate of 28.00%, what is their WACC (weighted average cost of capital)?

round to 2 decimal places

Answer 1

Assuming face value of bond to be $1000

Coupon = (5.42% of 1000) / 2 = 27.1

Number of periods = 11 * 2 = 22

Price = 98.93% of 1000 = 989.3

YTM = 5.5513%

Keys to use in a financial calculator:

2nd P/Y 2

FV 1000

PV -989.3

N 22

PMT 27.1

CPT I/Y

Cost of equity = (D1 / price) + growth rate

Cost of equity = (2.82 / 25.3) + 0.0362

Cost of equity = 0.147662 or 14.7662%

Weight of equity = 66%

Weight of debt = 100% - 66% = 34%

WACC = Weights * costs

WACC = 0.66*0.147662 + 0.34*0.055513*(1 - 0.28)

WACC = 0.097457 + 0.01359

WACC = 0.1110 or 11.10%