Question

TinTan Inc. is a appliance manufacturer in the USA. The company currently has 2,000,000 common shares outstanding. The shares currently sell for ​$11 each. The company paid an annual dividend of ​$4.00 last year to its shareholders and plans to increase the dividend annually at the rate of 5.0​%. TinTan Inc. also has 10,000 semiannual bonds outstanding with a coupon rate of 6​%, a maturity of 28 ​years, and a par value of ​$1,000. The bonds currently have a yield to maturity​ (YTM) of 14%. What is the weighted average cost of capital (WACC) for TinTan Inc. if the corporate tax rate is 40%?

When answering this problem enter your answer using percentage notation but do not use the % symbol and use two decimals (rounding). For example, if your answer is 0.10469 then enter 10.47; if your answer is 10% then enter 10.00

Answer 1

Market Value of equity =Number of shares*Share price =2000000*11 =22000000
Cost of equity=Current Dividend*(1+g)/Price+growth =4*(1+5%)/11+5% =43.1818%

Par value of Bond =1000
Semi annual Coupon =6%*1000/2 =30
Semi annual YTM =14%/2 =7%
Number of Periods =28*2 =56
Price of Bond =PV of Coupons+PV of Par Value =30*(((1-(1+7%)^-56)/7%)+1000/(1+7%)^56 =441.497614573672

Market Value of Debt =Price of Bond*Number of Bonds =441.497614573672*10000=4414976.1457
YTM =14%

WACC =Weight of Equity*Cost of Equity+Weight of Debt*Cost of Debt*(1-Tax Rate)
=22000000/(22000000+4414976.1457)*43.1818%+4414976.1457/(22000000+4414976.1457)*14%*(1-40%) =37.37%
or 37.37