Question

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).

Answer #1

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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