Question

Bonaime,
Inc., has 6.2 million shares of common stock outstanding. The
current share price is $61.20, and the book value per share is
$4.20. The company also has two bond issues outstanding. The first
bond issue has a face value of $70.2 million, a coupon rate of 7.2
percent, and sells for 97 percent of par. The second issue has a
face value of $35.2 million, a coupon rate of 6.7 percent, and
sells for 96 percent of par. The first issue matures in 22 years,
the second in 14 years. The most recent dividend was $2.95 and the
dividend growth rate is 8 percent. Assume that the overall cost of
debt is the weighted average of that implied by the two outstanding
debt issues. Both bonds make semiannual payments. The tax rate is
30 percent.

What is
the company’s WACC? **
(Do not round intermediate calculations and enter your answer as a
percent rounded to 2 decimal places, e.g.,
32.16.)**

WACC
%

Answer #1

Market value of equity=Number of shares*share price=6.2*61.2=379.44 million

Cost of equity=Recent Dividend*(1+growth rate)/Price+growth rate=2.95*(1+8%)/61.2+8%=13.206%

Cost of 22 year debt=2*RATE(22*2,7.2%*100/2,-97%*100,100)=7.48%

Cost of 14 year debt=2*RATE(14*2,6.7%*100/2,-96%*100,100)=7.16%

Overall cost of debt=(7.48%*70.2*97%+7.16%*35.2*96%)/(70.2*97%+35.2*96%)=7.3739%

Hence, WACC=(cost of debt*(1-tax rate)*Debt+cost of equity*Equity)/(Debt+Equity)=(7.3739%*(1-30%)*(70.2*97%+35.2*96%)+13.206%*379.44)/((70.2*97%+35.2*96%)+379.44)=11.5032%

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