Question

Anna is a Vice President at the J Corporation. The company is considering investing in a new factory and Anna must decide whether it is a feasible project. In order to assess the viability of the project, Anna must first calculate the rate of return that equity holders expect from the company stock. The annual returns for J Corp. and for a market index are given below. Currently, the risk-free rate of return is 1.2% and the market risk-premium is      2.4%     

Year	J Corp. Return (%)	Market Return (%)
1	-4.32	-2.10
2	16.30	8.21
3	24.12	12.12
4	16.12	8.12
5	-33.72	-16.80
6	31.64	15.88
7	8.84	4.48
8	26.00	13.06
9	10.08	5.10
10	18.30	9.21
11	-9.70	-4.79
12	-17.72	-8.80

                               

Refer to Question 2 above. Now that Anna has determined an appropriate rate   of return for J Corp.'s stock, she must calculate the firm's Weighted Average Cost of Capital (WACC). There are currently 52.4 Million J Corp. common shares outstanding. Each share is currently priced at $17.65. As well, the firm has 4,000 bonds outstanding and each bond has a face value of $10,000, a yield to maturity of 3.21% and a

quoted price of $10,121.20. J Corp.'s tax rate is 30%. J Corp. has no preferred shares outstanding.                                                                                            

What is J Corp.'s WACC?              

Answer 1

1. Return for Equity Holders - 6%

2. WACC - 5.84%