Question

TAFKAP Industries has 3 million shares of stock outstanding selling at $15 per share, and an issue of $20 million in 8.5 percent annual coupon bonds with a maturity of 20 years, selling at 104 percent of par. Assume TAFKAP’s weighted average tax rate is 34 percent and its cost of equity is 15.0 percent. What is TAFKAP’s WACC?

Answer 1

First of all we need to find YTM

YTM = interest + ( Face value less selling price)/n /  Face value + selling price)/n

Interest = 1000*8.5% = 85$

Selling price = 1000*104% = 1040$

n = 20

YTM = 85+(1000-1040)/20 / (1000+1040)/2

=85+(-40/20) / 2040/2

=85-2/1020

=8.14%

Thus cost of debt = 8.14%(1-tax rate)

=8.14%(1-0.34)

=8.14%*0.66

=5.37%

Cost of equity = 15%

Statement showing WACC

Source	Amount	Weight	K	WACC = W*K
Equity	45000000	68.39%	15.00%	10.258%
Debt	20800000	31.61%	5.37%	1.698%
	65800000			11.956%