Question

# 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 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).

 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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