Question

50 million shares $80 per share Beta = 1.11 Market risk premium = 7% Risk-free rate...

  1. 50 million shares
  2. $80 per share
  3. Beta = 1.11
  4. Market risk premium = 7%
  5. Risk-free rate = 2%

Debt Information

  1. $1 billion in outstanding debt (face value)
  2. Current quote = 108
  3. Coupon rate = 9%, semiannual coupons
  4. 15 years to maturity
  5. Tax rate =35%
  • What is the cost of equity? [K]
  • What is the before-tax cost of debt? [L]
  • What is the WACC?[M]
Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

According to capm approach expected return on stock is risk free rate plus beta times market risk premium

= 2+1.1×7 = 9.7%

Cost of debt is yield to maturity of bonds

= (C+(PV-RV)/N)/(PV+RV)/2

where c is coupon

Pv is present value

Rv is redemption value

N is years to maturity

= (9+(100-108)/15)/(100+108)/2

= 8.14%

Before tax cost of debt is 8.14%

Tax rate is 35%

After tax cost of debt is 8.14(1-0.35)= 5.291%

Market value of shares is

0.5×80 = 40 billion

Market value of debt is 1.08 billion

Wacc= (40×9.7% + 1.08×5.291%)/41.08

= 9.58%

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
XYZ company has a beta of 1.64 the risk free rate is .08% the market premium...
XYZ company has a beta of 1.64 the risk free rate is .08% the market premium is 5.5% the company has 70 million in outstanding bonds with a maturity date of 4 and 1/2 years from now the bonds are selling at 97% of par with a coupon of 25 semi-annually. The company has a total value of 195 million dollars with 500,000 shares of preferred stock at 35 per share and dividend of 1.75 the tax rate is 32%...
What is the WACC for the firm below? Market risk premium = 9%, risk-free rate =...
What is the WACC for the firm below? Market risk premium = 9%, risk-free rate = 4%, marginal tax rate = 40% Bonds: 10,000 bonds outstanding, $1,000 face value each, 10% annual coupon, 15 years to maturity, market price = $1100 per bond Common Stock: 2 million shares outstanding, $50 per share, beta = 1.5 A. 16.30% B. 12.30% C. 14.30% D. 15.30% E. 11.30%
Corporate Tax Rate = 30%  Market Risk Premium = 6%  Beta = 6.0% (...
Corporate Tax Rate = 30%  Market Risk Premium = 6%  Beta = 6.0% ( NO NEED to Unlever Beta)  Risk-Free Rate = 3.16% (2009) and 3.69% (2010)  Years to Maturity for 2032 Bond = 22 years (hence 44 coupon payments when computing 2009 WACC; 42 coupon payments when computing the 2010 WACC)  Years to Maturity for 2011 Bond = 3.5 years (hence 7 coupon payments when computing the 2009 WACC; 5 coupon payments when computing...
Watta Corp has a beta of .80. The market risk premium is 6%, and the risk-free...
Watta Corp has a beta of .80. The market risk premium is 6%, and the risk-free rate is 6%. Watta’s last dividend was $20 per share, and the dividend is expected to grow at 8% indefinitely. The stock currently sells for $45 per share. What’s Watta’s cost of equity capital? From worksheet 1 chapter 14, suppose Watta Corp from #5 has a target debt-equity ratio of 50%. Its cost of debt is 9% before taxes. If the tax rate is...
In the previous problem, suppose the company's stock has a beta of 1.15. The risk-free rate...
In the previous problem, suppose the company's stock has a beta of 1.15. The risk-free rate is 3.7%, and the market risk premium is 7%. Assume the overall cost of debt is the weighted average implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 35%. What is the company's WACC? Additional information: 8.3 million shares of common stock outstanding, Current share price = $53 , and the book value per share is $4....
The current stock price for a company is $50 per share, and there are 7 million...
The current stock price for a company is $50 per share, and there are 7 million shares outstanding. The beta for this firms stock is 1.2, the risk-free rate is 4.7, and the expected market risk premium is 5.6%. This firm also has 200,000 bonds outstanding, which pay interest semiannually. These bonds have a coupon interest rate of 7%, 16 years to maturity, a face value of $1,000, and a current price of 1,035.54. If the corporate tax rate is...
The current stock price for a company is $44 per share, and there are 7 million...
The current stock price for a company is $44 per share, and there are 7 million shares outstanding. The beta for this firms stock is 1.5, the risk-free rate is 4.2, and the expected market risk premium is 5.8%. This firm also has 200,000 bonds outstanding, which pay interest semiannually. These bonds have a coupon interest rate of 7%, 27 years to maturity, a face value of $1,000, and an annual yield to maturity of 8.8%. If the corporate tax...
The current stock price for a company is $31 per share, and there are 7 million...
The current stock price for a company is $31 per share, and there are 7 million shares outstanding. The beta for this firms stock is 0.9, the risk-free rate is 4.7, and the expected market risk premium is 6.4%. This firm also has 60,000 bonds outstanding, which pay interest semiannually. These bonds have a coupon interest rate of 7%, 9 years to maturity, a face value of $1,000, and an annual yield to maturity of 6.5%. If the corporate tax...
Common stock:   1 million shares outstanding, $40 per share, $1 par value, beta = 0.8 Preferred...
Common stock:   1 million shares outstanding, $40 per share, $1 par value, beta = 0.8 Preferred stock:   200,000 shares outstanding, $44 per share, $3.50 per share annual dividend Debt: 10,000 bonds outstanding, $1,000 face value, 8% coupon, 20 yrs to maturity, price = 112% of par Other: Market return = 14.6%, risk-free rate = 6%, company tax rate = 28% What is this company's WACC? A. 8.67% B. 10.67% C. 12.33% D. 9.50% E. 7.33%
Calculate the WACC based on the following information. Assume tax rate is 35%. Debt: $10M face...
Calculate the WACC based on the following information. Assume tax rate is 35%. Debt: $10M face value, current price $10.8M, 6.4% coupon rate, 25 years to maturity, semiannual coupon payment. (Hint: cost of debt is YTM of the bond) Equity: 495,000 shares outstanding, market price $63, beta 1.15. Market: MRP 7%, 3.2% risk free rate
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT