Question

Advance Manufacturing has 8.2 million shares of common stock outstanding. The current share price is $50, and the book value per share is $8.

The company has 200,000 9% coupon bonds outstanding, $1,000 par value, 15 years to maturity, currently selling for 97% of par, and the bonds make annual payments.

Suppose the company’s stock has a beta of 1.3. The risk free rate is 3.5%, and the market risk premium is 7%. The company’s tax rate is 35%.

Please find the WACC for the company. Please show all your intermediate steps.

Answer 1

	Market value
Common stock (8.2 million * $50)	410000000
Debt (200000*1000 * 97%)	194000000
Total	604000000

Cost of common stock

Required rate of return = risk free rate + market risk premium * beta

= 3.5% + 1.3*7%

= 3.5% + 9.1%

= 12.6%

Cost of debt (after tax)

Yield to maturity (approx.) = {interest payment + [face value - current price]/ yield to maturity} / [face value + current price]/ 2] * (1+ tax)

= {(1000*9%) + [1000-970]/15} / ([1000+970]/2) * (1- 0.35)

= {90 + 2} / 985 * 0.65

= 92 / 985 * 0.65

= 6.097%

WACC for the company :

	market value	Weightage	Cost of capital	WACC
Common stock	410000000	0.68	12.6%	8.568%
Debt	194000000	0.32	6.097%	1.951%
	604000000			10.52%

WACC for the company = 10.52%