Question

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 rate is 32%, 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).

Answer #1

As per CAPM cost of equity: | |||

Ke = Rf + beta x Rmp | |||

Ke = 4.2% + 1.5 x 5.8% | |||

Ke = 12.9% | |||

Market value of equity | |||

7000000 x $44 = 308,000,000 | |||

cost of bond calculation | |||

Cost of bond | 8.80% | ||

After Tax cost | 5.98% | (8.8% x (1-0.32) | |

Present value of 1 bond | |||

FV | 1000 | ||

PMT | 35 | (1000 x 7%/2) | |

NPER | 54 | (27 x 2) | |

Rate(YTM) | 4.40% | (8.8%/2) | |

PV | ($815.45) | ||

=PV(4.4%,54,35,1000) | |||

Market value of total bonds | |||

200000 x $815.45 = 163090000 | |||

Weight calculation | % | ||

Equity | 308000000 | 65.38% | |

Bond | 163090000 | 34.62% | |

471090000 | 100.00% | ||

WACC = Ke x We + Kd + Wd | |||

12.9% x 65.38% + 5.98% x 34.62% | |||

10.50% |

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