Question

2. Whole Foods Markets is a retailer of organic foods The firm, which operates under the ticker symbol WFMI uses bonds, preferred stock, and common stock for funding. Use the following information to estimate WFMI’s WACC:

Whole Foods’ bonds each sell for $935, pay coupons of $20 every six months, and have 8 years remaining to maturity. The par value of the bonds is $1,000. The total market value of the bonds is currently $929.2 million.

Whole foods has preferred stock as well which carries a total market value of $425 million. Each share sells for $25 and pays a dividend of $0.50 quarterly.

Whole foods has 140.3 million shares of common stock outstanding. Each share of stock is selling for $18.50.

The risk-free rate is currently 3%, and you believe the market risk premium is 6%.

According to ValueLine, WFMI’s beta is 1.05 and their tax rate is 41%.

Answer 1

The yield to maturity can be calculated as :

FV = $1000

PV = ($935)

N = 16 years

PMT = $20

So, the yield to maturity is :

I/Y = 4.9956%

The cost of preference capital is :

=Yearly Preference dividend/ price of preference share

= 0.5*4/ $25

= 8%

The cost of equity is :

Re = Rf + beta*(Rm - Rf)

= 3 + 1.05*6

= 9.3%

The market value of debt is : $929.2

The market value of preference shares is : $425

The market value of equity is : 140.3*$18.5

= $2595.55

The total market value is : $3949.75

So, the WACC is :

Weight of debt * after tax yield of debt + weight of preference share* cost of preference + weight of equity * cost of equity

= (929.2)/(3949.75)*0.05*(1- 0.41) + (425)/(3949.75)*(0.08) + (2595.55)/(3949.75)*(0.093)

= 0.0069 + 0.0086 + 0.0611

= 7.66%

So, the WACC is 7.66%.