Question

The current stock price for a company is $46 per share, and there are 7 million...

The current stock price for a company is $46 per share, and there are 7 million shares outstanding. The beta for this firms stock is 1, the risk-free rate is 4.5, and the expected market risk premium is 5.5%. This firm also has 250,000 bonds outstanding, which pay interest semiannually. These bonds have a coupon interest rate of 9%, 12 years to maturity, a face value of $1,000, and a current price of 1,147.61. If the corporate tax rate is 31%, what is the Weighted Average Cost of Capital (WACC) for this firm? (Answer to the nearest hundredth of a percent, but do not use a percent sign).

Homework Answers

Answer #1

According to the CAPM,

Ke = Rf + [Market Risk Premium]

= 4.5% + 1[5.5%] = 10%

To find the Kd, we need to put the following values in the financial calculator;

INPUT 12X2 = 24 -$1,147.61 $45 $1,000
TVM N I/Y PV PMT FV
OUTPUT 3.57%

This is a semi-annual YTM. So, Annual YTM = 3.57% x 2 = 7.15%

Market Value of Equity = $46 x 7,000,000 = $322,000,000

Market Value of Debt = $1,147.61 x 250,000 = $286,902,500

Total Market Value = Market Value of Equity + Market Value of Debt

= $322,000,000 + $286,902,500 = $608,902,500

WACC = [Wd x Kd(1 - t)] + [We x Ke]

= [($286,902,500/$608,902,500) x 7.15% x (1 - 0.31)] + [($322,000,000/$608,902,500) x 10%]

= 2.32% + 5.29% = 7.61%

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
The current stock price for a company is $40 per share, and there are 5 million...
The current stock price for a company is $40 per share, and there are 5 million shares outstanding. The beta for this firms stock is 1, the risk-free rate is 4.5, and the expected market risk premium is 6%. This firm also has 60,000 bonds outstanding, which pay interest semiannually. These bonds have a coupon interest rate of 6%, 20 years to maturity, a face value of $1,000, and a current price of 1,129.41. If the corporate tax rate is...
The current stock price for a company is $50 per share, and there are 7 million...
The current stock price for a company is $50 per share, and there are 7 million shares outstanding. The beta for this firms stock is 1.2, the risk-free rate is 4.7, and the expected market risk premium is 5.6%. This firm also has 200,000 bonds outstanding, which pay interest semiannually. These bonds have a coupon interest rate of 7%, 16 years to maturity, a face value of $1,000, and a current price of 1,035.54. If the corporate tax rate is...
The current stock price for a company is $44 per share, and there are 7 million...
The current stock price for a company is $44 per share, and there are 7 million shares outstanding. The beta for this firms stock is 1.5, the risk-free rate is 4.2, and the expected market risk premium is 5.8%. This firm also has 200,000 bonds outstanding, which pay interest semiannually. These bonds have a coupon interest rate of 7%, 27 years to maturity, a face value of $1,000, and an annual yield to maturity of 8.8%. If the corporate tax...
The current stock price for a company is $31 per share, and there are 7 million...
The current stock price for a company is $31 per share, and there are 7 million shares outstanding. The beta for this firms stock is 0.9, the risk-free rate is 4.7, and the expected market risk premium is 6.4%. This firm also has 60,000 bonds outstanding, which pay interest semiannually. These bonds have a coupon interest rate of 7%, 9 years to maturity, a face value of $1,000, and an annual yield to maturity of 6.5%. If the corporate tax...
The current stock price for a company is $41 per share, and there are 8 million...
The current stock price for a company is $41 per share, and there are 8 million shares outstanding. The beta for this firms stock is 1.4, the risk-free rate is 4.4, and the expected market risk premium is 5.6%. This firm also has 170,000 bonds outstanding, which pay interest semiannually. These bonds have a coupon interest rate of 8%, 24 years to maturity, a face value of $1,000, and a current price of 1,059.68. If the corporate tax rate is...
The current stock price for a company is $33 per share, and there are 7 million...
The current stock price for a company is $33 per share, and there are 7 million shares outstanding. This firm also has 60,000 bonds outstanding, which pay interest semiannually. If these bonds have a coupon interest rate of 8%, 24 years to maturity, a face value of $1,000, and an annual yield to maturity of 6.8%, what is the percent market value of debt for this firm? (Answer to the nearest hundredth of a percent, but do not use a...
The current stock price for a company is $31 per share, and there are 6 million...
The current stock price for a company is $31 per share, and there are 6 million shares outstanding. This firm also has 260,000 bonds outstanding, which pay interest semiannually. If these bonds have a coupon interest rate of 7%, 26 years to maturity, a face value of $1,000, and an annual yield to maturity of 6.2%, what is the percent market value of debt for this firm? (Answer to the nearest hundredth of a percent, but do not use a...
38. The current stock price for a company is $41 per share, and there are 5...
38. The current stock price for a company is $41 per share, and there are 5 million shares outstanding. This firm also has 50,000 bonds outstanding, which pay interest semiannually. If these bonds have a coupon interest rate of 8%, 19 years to maturity, a face value of $1,000, and a current price of 976.95, what is the percent market value of equity for this firm? (Answer to the nearest hundredth of a percent, but do not use a percent...
The current stock price for a company is $31 per share, and there are 2 million...
The current stock price for a company is $31 per share, and there are 2 million shares outstanding. This firm also has 200,000 bonds outstanding, which pay interest semiannually. If these bonds have a coupon interest rate of 6%, 29 years to maturity, a face value of $1,000, and an annual yield to maturity of 7.2%, what is the percent market value of debt for this firm? (Answer to the nearest hundredth of a percent, but do not use a...
The current stock price for a company is $43 per share, and there are 3 million...
The current stock price for a company is $43 per share, and there are 3 million shares outstanding. This firm also has 80,000 bonds outstanding, which pay interest semiannually. If these bonds have a coupon interest rate of 6%, 10 years to maturity, a face value of $1,000, and an annual yield to maturity of 7.1%, what is the total market value of this firm? (Answer to the nearest dollar, but do not use a dollar sign).