Question

Pearson Ltd is financed through the following sources:

•  Ordinary share: 100 million shares outstanding, with current market price of

  one share at $2.2

•  Bank loan: $100 million borrowed from ANZ bank with an interest rate of 6%

•  Corporate bond: Pearson’s corporate bond is currently trading at 80% of its

  face value. The bonds pay coupons once per annum and have a total book value of $100 million. The current yield to maturity on the bond is 8% per annum.

  The risk-free rate is 3% and the market risk premium is 6%. It is estimated that Pearson has an equity beta of 1.5. Assume corporate tax rate is 30%,

• calculate the WACC for Pearson Ltd.

Answer 1

Solution:

Ordinary share : Market value = 100 million shares * $2.2 =$220 million

Bank Loan: Market value = $100 million

Bond : Market value = 80% *100 million = $80 million

WACC = 8.77%