Question

Hero Manufacturing has 8.9 million shares of common stock outstanding. The current share price is $73 and the book value per share is $6. The company also has two bond issues outstanding. The first bond issue has a face value of $65 million, a coupon rate of 6.3 percent and sells for 109.3 percent of par. The second issue has a face value of $52.8 million, a coupon rate of 8.2 percent and sells for 113.1 percent of par. The first issue matures in 10 years, the second in 26 years.

Suppose the company’s stock has a beta of 1.4. The risk-free rate is 3.2 percent and the market risk premium is 7.3 percent. Assume that the overall cost of debt is the weighted average implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 21 percent. What is the company’s WACC

Answer 1

Required rate of Return = rf + B * mp = 0.032 + (1.4 * 0.073) = 0.1342 or 13.42%
Firm's value (market) = (8.9 * 73) + (65 * 109.3%) + (52.80 * 113.1%) =780.4618m
WACC = Wd * Cd (1 - tax) + We * Ce
WACC = (65 * 109.3%/780.4618) * 0.063 (1 - 0.21) +(52.8 * 113.1%/780.4618) * 0.082 (1 - 0.21) + 8.9 * 73 * 0.1342/780.4618
WACC = 0.00453 + 0.004957 + 0.11172 = 0.1212 or 12.12%