Question

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

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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