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ABC co. has one debt issue outstanding it is an annual 9.5% coupon bond with a...

ABC co. has one debt issue outstanding it is an annual 9.5% coupon bond with a face value of 120 million a maturity of 8 years and it sells at par value the company also has 7 million shares outstanding trading at 50 each suppose you belıeve that th company beta ıs 1.5 the risk free rate is 4% and the market risk premium is 8% of the firms tax rate is 25 what is the weighted average cost of capital?

PLEASE DO NOT SOLVE WİTH EXCELL CHART proffesor do not accept

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Answer #1

Cost of Debt is same as YTM of bond
Since bond is sold at par hence YTM and Coupon Rate are Same
Cost of Debt =9.5%
Value of Debt = 120 million

Cost of equity using CAPM model = Risk Free Rate + Beta * Market risk Premium = 4% + 1.5*8% =16%
Value of Equity =Price*Number of Shares = 50*7 = 350

Total Value of firm =Value of debt + value of equity =120+350 = 470

WACC = Weight of Equity * Cost of Equity + weight of Debt* Cost of Debt*(1-Tax rate) =350/470*16%+120/470*9.5%*(1-25%) =13.73%

Hence WACC = 13.73%

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