Question

Given the information provided here, what is this firm's WACC?

• coupon rate on bonds = 4.0%
• years until maturity on the bonds = 11
• current price of company bonds = $1,094.32
• recent stock price = $29.10
• most recently paid common dividend = $3.20
• anticipated growth rate of common dividend = 2.5%
• average effective tax rate over past five years = 30%
• long-term debt = $120 million
• total shareholder's equity = $300 million

Answer 1

For Bonds,

Bond Par Value = $1,000

Coupon Rate = 4%

Time Period = 11 years

Current Price of Bond = $1,094.32

Calculating YTM of Bond,

Using TVM Calculation,

YTM = [PV = 1094.32, FV = 1000, T = 11, PMT = 40]

YTM = 2.98%

For Stocks,

Stock Price = $29.10

Common Dividend = $3.20

Dividend Growth Rate = 2.5%

Using DDM Model,

Stock Price = D₀(1 + g)/(r - g)

29.10 = 3.20(1.025)/(r - 0.025)

r = 3.20(1.025)/(29.10) + 0.025

r = 13.77%

WACC = (120/(120+300))(0.0298)(1 - 0.30) + (300/(120+300))(0.1377)

WACC = 0.00596 + 0.09835

WACC = 10.43%