Question

A company has $91 million in outstanding bonds, and 10 million shares of stock currently trading...

A company has $91 million in outstanding bonds, and 10 million shares of stock currently trading at $32 per share.The bonds pay an annual coupon rate of 5% and is trading at par. The company's beta is 0.7, its tax rate is 40%, the risk-free rate is 4%, and the market risk premium is 6%. What is this firm's WACC?

Enter your answer as a percentage, without the percentage sign ('%'), rounded to 1 decimal. For example, if your answer is 0.0789, that's 7.9%, so just enter 7.9

Homework Answers

Answer #1

The WACC is computed as shown below:

= cost of debt x (1 - tax rate) x weight of debt + cost of equity x weight of equity

Cost of debt will be equal to the coupon rate of 5%, since the bond is trading at par.

Cost of equity is computed as shown below:

= risk free rate + beta x market risk premium

= 0.04 + 0.7 x 0.06

= 8.2% or 0.082

So, the WACC will be computed as follows:

= 0.05 x (1 - 0.40) x $ 91 million / ( $ 91 million + 10 million x $ 32 ) + 0.082 x ( 10 million x $ 32 ) / ( $ 91 million + 10 million x $ 32 )

= 0.05 x 0.60 x $ 91 million / $ 411 million + 0.082 x $ 320 million / $ 411 million

= 7.0 Approximately

Feel free to ask in case of any query relating to this question

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Chirping Burger Corporation considers an expansion project. It currently has 10 million outstanding shares trading at...
Chirping Burger Corporation considers an expansion project. It currently has 10 million outstanding shares trading at $30 per share. Equity has an estimated beta of 1.4. The risk-free rate is 2%, while the market risk premium is 5%. It also has 200,000 outstanding bonds with 20 years to maturity, 8% coupon rate, $1,000 par, currently trading at par. The corporate tax rate is 30%. The project will require an investment if $112 million and will produce a net after tax...
A firm has 14 million shares of common stock outstanding with a beta of 1.15 and...
A firm has 14 million shares of common stock outstanding with a beta of 1.15 and a market price of $42 a share. The 10 percent semiannual bonds are selling at 91 percent of par/face value. There are 220,000 bonds outstanding that mature in 17 years. The market risk premium is 6.75 percent, T-bills are yielding 3.5 percent, and the firm's tax rate is 32 percent. 1. What is the firms cost of Equity? by using CAPM 2. What is...
A company has 3 million shares outstanding at a market price of $1.50 each. The company's...
A company has 3 million shares outstanding at a market price of $1.50 each. The company's bonds have a total market value of $2,700,000, have a coupon rate of 3% p.a. and currently yield 4% p.a. The current market value of preference shares is $500,000 and currently return 5% p.a. The company has a beta of 0.7, the market risk premium is 6% p.a., the risk-free return is 2% p.a., and the company tax rate is 30%, What is the...
A company has 3 million shares outstanding at a market price of $1.50 each. The company's...
A company has 3 million shares outstanding at a market price of $1.50 each. The company's bonds have a total market value of $2,700,000, have a coupon rate of 3% p.a. and currently yield 4% p.a. The current market value of preference shares is $500,000 and currently return 5% p.a. The company has a beta of 0.7, the market risk premium is 6% p.a., the risk-free return is 2% p.a., and the company tax rate is 30%, What is the...
A company has 3 million shares outstanding at a market price of $1.50 each. The company's...
A company has 3 million shares outstanding at a market price of $1.50 each. The company's bonds have a total market value of $2,700,000, have a coupon rate of 3% p.a. and currently yield 4% p.a. The current market value of preference shares is $500,000 and currently return 5% p.a. The company has a beta of 0.7, the market risk premium is 6% p.a., the risk-free return is 2% p.a., and the company tax rate is 30%, What is the...
A company has 3 million shares outstanding at a market price of $1.50 each. The company's...
A company has 3 million shares outstanding at a market price of $1.50 each. The company's bonds have a total market value of $2,700,000, have a coupon rate of 3% p.a. and currently yield 4% p.a. The current market value of preference shares is $500,000 and currently return 5% p.a. The company has a beta of 0.7, the market risk premium is 6% p.a., the risk-free return is 2% p.a., and the company tax rate is 30%, What is the...
A company has 3 million shares outstanding at a market price of $1.50 each. The company's...
A company has 3 million shares outstanding at a market price of $1.50 each. The company's bonds have a total market value of $2,700,000, have a coupon rate of 3% p.a. and currently yield 4% p.a. The current market value of preference shares is $500,000 and currently return 5% p.a. The company has a beta of 0.7, the market risk premium is 6% p.a., the risk-free return is 2% p.a., and the company tax rate is 30%, What is the...
A company has 3 million shares outstanding at a market price of $1.50 each. The company's...
A company has 3 million shares outstanding at a market price of $1.50 each. The company's bonds have a total market value of $2,700,000, have a coupon rate of 3% p.a. and currently yield 4% p.a. The current market value of preference shares is $500,000 and currently return 5% p.a. The company has a beta of 0.7, the market risk premium is 6% p.a., the risk-free return is 2% p.a., and the company tax rate is 30%, What is the...
A Mining company has 4.3 million shares of common stock outstanding and 85,000 bonds outstanding, par...
A Mining company has 4.3 million shares of common stock outstanding and 85,000 bonds outstanding, par value of $1,000 each. Each bond has a 6.8 percent annual coupon rate and the bonds have 23 years to maturity and is now selling at $789.23. (Based on the current price, its YTM is 9%) Coupon is paid annually. The common stock currently sells for $58.00 per share and has a beta of 0.90. The market risk premium is 7 percent and Treasury...
There are 2 million common shares of stock outstanding, currently trading for $35 per share. The...
There are 2 million common shares of stock outstanding, currently trading for $35 per share. The most recent dividend paid was $4 per share. Dividends are expected to increase by 2% per year for the foreseeable future. There are 25,000 bonds outstanding with a coupon rate of 5% that mature in eight years. The face value of these bonds is $1000, coupon payments are made annually, and the yield to maturity is 4%. There are 75,000 bonds outstanding with a...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT