Question

a company needs 1 billion financing for development. estimate the cost of capital.

20 years bonds mature in 10 years. currently a coupon rate of 8%, paid semi annually. the price of bonds today is 1200$ with 2500 bonds on the market.

new common shares can be issued for 30$ with a cost of $2. dividends paid out this year for 1.80$. the growth rate is estimated at 7%. there are 300 000 common shares on market today. corporate tax is 30%. what is the WACC and show your work.

Answer 1

cost of debt	using rate function in M S excel	rate(nper,pmt,pv,fv,type) nper = 10*2 = 20 pmt = 1000*4% = 40 pv = -1200 fv = 1000 type = 0	2.7%
Annual after tax cost	2*2.7*(1-.3)	3.78
cost of common share	(expected dividend/market price)+growth rate	(1.8*1.07)/28))+7%	13.88%
WACC
source	value	weight	cost	weight*cost
debt	3000000	0.25	0.0255	0.006364
common stock	9000000	0.75	0.1388	0.1041
total	12000000		WACC	11.04%

Cost of debt = interest+(redemption value-market price)/time to maturity / (redemption value+market value)/2

40+(1000-1200)/20 / (1000+1200)/2

20 / 1100 =1.81% approximate

After tax annual cost of debt = (1.81*2)*(1-.3) =2.55 Approximate