Question

Caspian Sea Drinks' is financed with 69.00% equity and the remainder in debt. They have 12.00-year, semi-annual pay, 5.72% coupon bonds which sell for 98.11% of par. Their stock currently has a market value of $24.59 and Mr. Bensen believes the market estimates that dividends will grow at 3.61% forever. Next year’s dividend is projected to be $2.16. Assuming a marginal tax rate of 28.00%, what is their WACC (weighted average cost of capital)?

Answer 1

Assuming face value to be $1000

Coupon = (5.72% of 1000) / 2 = 28.6

Number of periods = 12 * 2 = 24

Price = 98.11% of 1000 = 981.1

YTM = 2.97125%

Keys to use in a financial calculator:

2nd P/Y 2

FV 1000

PV -981.1

PMT 28.6

N 24

CPT I/Y

Cost of equity = (D1 / price) + growth rate

Cost of equity = (2.16 / 24.59) + 0.0361

Cost of equity = 0.123941 or 12.3941%

Weight of debt = 100% - 69% = 31%

WACC = Weights * costs

WACC = 0.69*0.123941 + 0.31*0.0297125*(1 - 0.28)

WACC = 0.085519 + 0.006632

WACC = 0.0922 or 9.22%