Question

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

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

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