Question

Allen’s Authentic Automotive has 90,000 ordinary shares outstanding (with a beta of 1.13) which are currently selling at $72.00 per share. The rate of return required by ordinary shareholders is 12.00%. The firm also has 35,000, preference shares outstanding with a current market price of $54 a share. The preference shares have a book value of $100 each and have a rate of return of X.XXX% [last four digits of your student ID*] . There are currently 4,500 bonds outstanding with a face value of $1,000 each. The bonds are currently selling for 95% of face. The yield-to-maturity on bonds of similar rating and term to maturity is 7.65%. What is the firm's weighted average cost of capital if the tax rate is 25%? Assume a classical tax system. * If your student ID was 876543 then your cost of preference shares be 6.543% Required: (Please draw up a table to assist with the calculations and formatting of answer. Please show all workings to maximise marks. No workings no marks) A. Showing all calculations calculate the WACC for Allen’s Authentic Automotive.

Answer 1

we used the market value weight to calculate WACC

WACC = 9.0666% or 9.07%