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.

 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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