Question

# 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 35%, 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).

Value of equity = 40*50 million =200 million
Cost of equity = Rf+(beta*Market risk premium)=4.5+(1*6)=10.5%

Value of debt = 60,000*1129.41=67,764,600 or 67.7646 million

n=40
coupon=30
FV=1000
PV=-1129.41
USing excel rate formula:
=RATE(40,30,-1129.41,1000)
YTM=4.97%

After tax cost of debt =4.97*(1-0.35)=3.23%
WACC = (cost of equity*weight of equity)+(Cost of debt*weight of debt)
=(0.7469*10.50)+(0.2531*3.23)=8.66%

 Capital Value Percentage Rate Equity \$ 200.00 74.69% 10.50% Debt \$    67.76 25.31% 3.23% Total \$ 267.76

WACC = (cost of equity*weight of equity)+(Cost of debt*weight of debt)
=(0.7469*10.50)+(0.2531*3.23)=8.66%

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