Question

Your company is estimating its WACC. Its target capital structure is 35 percent debt, 10 percent preferred stock, and 55 percent common equity. Its bonds have a 10 percent coupon, paid semi-annually, $1000 par value, a current maturity of 8 years, and sell for $950. The firm’s preferred stock sell for $75 and pay quarterly dividend of $2. This company’s beta is 1.25, the risk-free rate is 4 percent, and the expected market return is 9 percent. The firm's marginal tax rate is 30 percent. What is the WACC of this company?

Answer #1

Computation of post tax cost of debt | ||||

put in calculator | ||||

FV | 1000 | |||

PV | -950 | |||

N | 8*2 | 16 | ||

PMT | 1000*10%/2 | 50 | ||

compute I | 5.48% | |||

Pretax cost of debt 5.48%*2 | 10.95% | |||

Post tax cost of debt = 10.95%*(1-30%) | 7.67% | |||

Cost of preferred dividend = Annual dividend/Price today | ||||

2*4/75 | ||||

10.67% | ||||

Cost of equity = | ||||

4%+(9%-4%)*1.25 | ||||

10.25% | ||||

Computation of WACC | ||||

Source | Weight | Cost | Weight*cost | |

Debt | 35% | 7.67% | 2.68% | |

Preferred stock | 10% | 10.67% | 1.07% | |

Equity | 55% | 10.25% | 5.64% | |

WACC | 9.39% | |||

Answer = |
9.39% |
|||

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