Question

Acme Inc. currently has 500,000 common shares outstanding that are currently trading at $35 per share....

Acme Inc. currently has 500,000 common shares outstanding that are currently trading at $35 per share. When the shares were originally issued one year ago, their price was $20. The Beta of the company is 1.1 and the market risk premium is 4.5%. The company also has 250,000 shares of preferred stock outstanding for which it pays an annual dividend of $2.50 per share. These preferred shares currently trade at $60 per share. Acme has also just issued 1,500 bonds that are currently valued at 96% of par and have a yield-to-maturity of 6.42%. The company is in the 34% tax bracket. Treasury bills currently yield 6%.

What is the weight associated with the company's debt at market value?

What is the WACC of the company at market value?

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Answer #1

Weight of Debt = Market value of Debt/Total Market value

= 1500*1000*96%/(1500*1000*96%+500,000*35 + 250,000*60)

= 4.24%

Cost of Common Equity = Risk free rate + beta*market risk premium

= 6% + 1.1*4.5%

= 10.95%

Cost of preferred stock = Annual Dividend/Current price

= 2.50/60

= 4.1667%

WACC = Cost of Equity*Weight of Equity + cost of Preferred Stock*Weight of Preferred Stock + After tax cost of debt*Weight of debt

= 10.95%*500,000*35/33940000 + 4.1667%*250,000*60/33940000 + 6.42%*(1-34%)*1440000/33940000

= 7.67%

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