Question

Given the following information of Nordic Firm Debt value: $75,000, 8.4 percent coupon bonds outstanding. $1,000...

Given the following information of Nordic Firm

Debt value: $75,000, 8.4 percent coupon bonds outstanding. $1,000 par value, 22 years to maturity, selling for $1,030, the bonds make annual payments.

Common stock value: $175,000, beta is 1.21.

Market: 13.1 percent market return and 5.1 percent risk-free rate.

Assume the company's tax rate is 40 percent. Calculate the WACC for this firm.

a) 11.8%

b) 12.78%

c)7.48%

d) 9.19%

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Homework Answers

Answer #1

Coupon = 0.084 * 1000 = 84

Yield to maturity = 8.1035%

Keys to use in a financial calculator: FV 1000, PV -1030, PMT 84, N 22, CPT I/Y

Cost of equity = Risk free rate + beta (market risk premium)

Cost of equity = 0.051 + 1.21 (0.131)

Cost of equity = 0.2095 or 20.95%

Total market value of capital structure = 75,000 + 175,000 = 250,000

WACC = (75,000 / 250,000)*0.081035*(1 - 0.4) + (175,000 / 250,000)*0.2095

WACC = 0.01459 + 0.14665

WACC = 0.1612 or 16.12%

Options does not look correct

WACC =

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