Question

Q) Suppose a firm has 48.50 million shares of common stock outstanding at a price of $38.28 per share.  The firm also has 295000.00 bonds outstanding with a current price of $1,174.00. The outstanding bonds have yield to maturity 6.51%. The firm's common stock beta is 1.24 and the corporate tax rate is 39.00%. The expected market return is 14.85% and the T-bill rate is 5.36%. 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

Market value of the equity=Outstanding shares*share price=48.50 million shares*$38.28=$1856.58 million

Market value of the debt=Outstanding bonds*price per bond=295000*$1174=$346.33 million

1.Weight of equity=value of equity/Total value=$1856.58/(1856.58+346.33)=84.28%

2.Weight of debt=Value of debt/Total value=$346.33/(1856.58+346.33)=15.72%

3. Cost of equity=risk free rate+(beta*market risk premium)

risk free rate=Treasury bill rate=5.36%

market risk premium=expected market return-t-bill rate=14.85%-5.36%=9.49%

beta=1.24

Cost of equity=5.36%+(1.24*9.49%)=17.13%

4. After tax cost of debt=(before tax cost of debt)*(1-tax rate)

before tax cost of debt will be YTM of the bonds=6.51%

tax rate=39%

After tax cost of debt=6.51%*(1-39%)=3.97%

5. WACC= (weight of the equity*cost of equity)+(weight of debt*after tax cost of debt)

=(84.28%*17.13%)+(15.72%*3.97%)

WACC=15.06%