Question

South firm has 30,000 shares of stock outstanding that are currently valued at $48 a share and provide a 13 percent rate of return. The firm also has 1000 bonds outstanding that have a face value of $1,000, a market price of $1,068, and a 7 percent coupon. These bonds mature in 6 years and pay interest semiannually. The tax rate is 35 percent. The company has 10000 shares of preferred stock with price $80 and return of 10% per year. The average tax rate is 35 percent. What is the WACC for South firm?

Answer #1

**WACC = Wd*kd +
We*ke + Wp*kp**

Weight are to be calculated on the market value-

Calculation of weights | ||||

Outstanding | Market price | Total | Weights | |

Shares | 30000 | 48 | 1440000 | 0.44 |

Bonds | 1000 | 1068 | 1068000 | 0.32 |

Preference share | 10000 | 80 | 800000 | 0.24 |

Total | 3308000 | 1 |

calculation of cost of debt -

Enter the stroke in the financial calculator -

PV = -1068

FV = 1000

PMT = 35(1000*7% = 70 / /2 = 35 , interest is paid
semiannually)

N = 12 (6*2 = 12)

CPT -I/Y = 2.84

YTM = 2.84*2 = 5.64%

Cost of debt after tax = Interest (1- t)

**Cost of debt after tax = 5.64 (1- 0.35) =
3.67%**

Ke = 13%

Kp = 10%

**WACC = Wd*kd + We*ke +
Wp*kp
WACC = 0.32*3.67 +0.44*13 + 0.24*10
WACC =9.29%**

**I hope this clear your
doubt.**

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