Question

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?

Answer 1

kE = rF + beta[Market Risk Premium] = 0.08% + [1.64 x 5.5%] = 0.08% + 9.02% = 9.10%

kP = Annual Dividend / Share Price = 1.75 / 35 = 5%

To find the kD, we need to put the milfollowing values in the financial calculator:

INPUT	4.5*2=9		-970	25	1,000
TVM	N	I/Y	PV	PMT	FV
OUTPUT		2.88

Hence, kD = 2r = 2 x 2.88% = 5.77%

Market Value of Preferred Shares = $35 x 500,000 = $17,500,000

Market Value of Equity Shares = Total Firm Value - Market Value of Debt - Market Value of Preferred Shares

= $195 million - $70 million - $17.5 million = $107.5 million

WACC = [wD x kD x (1 - t)] + [wE x kE] + [wP x kP]

= [(70/195) x 5.77% x (1 - 0.32)] + [(107.5/195) x 9.10%] + [(17.5/195) x 5%]

= 1.41% + 5.02% + 0.45% = 6.87%