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%