Question

You have come up with the following data concerning Zion Company.

* The company has 2,500,000 shares.

* The company's debt is 90% from the company market value. The interest rate paid last year by the company was $500,000.

* The company paid total dividends of $800,000 last year, which is 25% of its pretax profit, and its expected growth next year is $50,000 more.

* The company paid taxes of $950,000.

* The cost of capital requested by the investors is 13%

What is the company's WACC?

Answer 1

Pretax profit = 800000/0.25 = 3,200,000

Taxes = 950,000

Tax rate = 950,000/3,200,000 = 0.296875 =29.6875%

Weight of debt = 90% = 0.9

Weight of equity =10% =0.10

Current share pirce = D0*(1+g)/(r-g)

D0 = 800,000/2,500,000 = 0.32

g = 850,000/800,000 -1 =0.0625 = 6.25%

r = 0.13 = 13%

Current share price = 0.32*(1.0625)/(0.13-0.0625) = 5.037

Total equity capital = 2,500,000*5.037 = 12,2592,592.59

Total Capital = 12,295,592.59/0.10 = 125,925,925.93

Total debt = 113,333,333.33

Interest rate =5,000,000/113,333,333.33 = 4.412%

After tax cost of debt = 4.412%*(1-0.296875) = 3.10%

Cost of equity = 13%

WACC = 0.9*3.10% + 0.1*13% = 4.09%