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%

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