Question

A firm has a bonds with 10 years to maturity, and a coupon rate of 8%...

A firm has a bonds with 10 years to maturity, and a coupon rate of 8% (paid semi?annually). The bond currently sells for $932. The firm has a beta of 1.2. The stock price is $20/share. 3?month treasury bills yield 5%. The firm has outstanding, $10 million in debt at face value and there 1 million shares of common stock outstanding. Assume that the market risk premium is 5% and the tax rate is 35%. Calculate the WACC.

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Answer #1

cost of debt

interest+(face value-market value)/period to maturity / (face value+market value)/2

40+(1000-932)/20 / (1000+932)/2

43.4/966

0.044928

Annual cost of debt

.044928*2

8.99%

after tax cost of debt

8.99-(1-.35)

5.84

cost of equity

risk free rate+(market risk premium)*beta

5+(5)*1.2

11

WACC

source

value of investment in millions

weight = value of source/total value of investment

cost

weight*cost

debt

9.32

0.317872

5.84

1.856371

common stock

20

0.682128

11

7.503411

total

29.32

WACC

sum of weight*cost

9.36
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