Question

Q1) Suppose a firm has 49.70 million shares of common stock outstanding at a price of $45.23 per share. The firm also has 261000.00 bonds outstanding with a current price of $919.00. The outstanding bonds have yield to maturity 9.35%. The firm's common stock beta is 1.345 and the corporate tax rate is 40.00%. The expected market return is 11.81% and the T-bill rate is 2.50%. Compute the following:

     a) Weight of Equity of the firm

     b) Weight of Debt of the firm

     c) Cost of Equity of the firm

     d) After Tax Cost of Debt of the firm

     e) WACC for the Firm

Answer 1

Total Equity Size =  49.70 million shares * $45.23 per share =2247.931 million

Total Debt Size = 261000 bonds * $919 = 239.859 million

Total Capital = Debt + Equity =2247.931 + 239.859 = 2487.79 million

1. Weight of Equity =2247.931/2487.79 =0.9036 (90.36%)
2. Weight of Debt = 239.859/2487.79 = 0.0964 (9.64%)
3. Cost of Equity = Rf+ Bea*(Rm-Rf) = 2.5+ 1.345*(11.81-2.5) = 15.022%
4. After tax Cost of Debt = 9.35(1-0.4) =5.61%
5. WACC = We*Ke +Wd*Kd*(1-t) =0.9036*15.022 +0.0964*9.35*(1-0.4) = 13.574+ 0.541 =14.115%