Question

Q) Suppose a firm has 36.80 million shares of common stock outstanding at a price of $30.50 per share. The firm also has 224000.00 bonds outstanding with a current price of $1,092.00. The outstanding bonds have yield to maturity 7.62%. The firm's common stock beta is 0.73 and the corporate tax rate is 40.00%. The expected market return is 14.13% and the T-bill rate is 2.14%. Compute the following:

-Weight of Equity of the firm

-Weight of Debt of the firm

-Cost of Equity of the firm

-After Tax Cost of Debt of the firm

-WACC for the Firm

Answer 1

(a) Calculation of Weight of Equity of Firm :

Common Stock Value = 36.80 million shares*$30.50

= $1122.40 million

Bond Value = 224000 bonds*$1092

= $244.608 million

Weight of equity of firm (We) = Common stock value / (Common stock value + Bond Value)

= $1122.40 / ($1122.40+$244.608)

= 0.821

(b)  Calculation of Weight of Debt of Firm :

Weight of Debt of Firm (Wd) = Bond Value / (Common stock value + Bond Value)

  = $244.608 / ($1122.40+$244.608)

  = 0.179

(c) Calculation of cost of equity of firm :

E(r) = Rf + (Rm - Rf)

14.13 = 2.14 + 0.73(Rm -2.14)

16.42 = Rm -2.14

Rm = 16.42+2.14

Rm (Ke) = 18.56%

(d) Calculation of After Tax Cost of Debt of the firm :

After Tax Cost of Debt of the firm [Kd(1-t)] = 7.62(1-0.40)

= 4.572%

(e) Calculation of WACC for the Firm :

WACC (Ko) = Ke*We + [Kd(1-t)]*Wd

= 18.56*0.821 + 4.572*0.179

= 16.06%