Question

ABC Inc. recently is doing the following financing: (1) The firm's non-callable bonds mature in 20 years, have an 6.00% annual coupon, a par value of $1,000, and a market price of $1,050.00. (2) The company’s tax rate is 40%. (3) The risk-free rate is 5%, the market return is 12%, and the stock’s beta is 1.20. (4) The target capital structure consists of half debt and half equity. The firm uses the CAPM to estimate the cost of common stock, and it does not expect to issue any new shares. What is its WACC?

Answer #1

**Cost of Equity [ CAPM
]**

= Rf + Beta (Rm – Rf)

= 5% + 1.20 ( 12% - 5% )

= 13.40%

**Cost of Debt [ Bond
YTM ]**

YTM = Coupon Amount + [ (Par Value – Bond Price) / Maturity Years ] / [(Par Value + Bond Price)/2]

= $60 + [ ($1,000 - $1,050) / 20 ) ] / [($1,000 + $1,050) / 2]

= [$60 - $2.50 / $1,025] x 100

= 5.61%

After Tax Cost of Bond = 5.61% x [ 1 - 0.40 ] = 3.37%

Weight of Equity = 50%

Weight of Debt = 50%

Weighted Average Cost of Capital [WACC]

= [ Cost of Equity x Weight of Equity ] + [ Cost of Debt x Weight of Debt ]

= [13.40% x 0.50 ] + [ 3.37% x 0.50 ]

= 6.70% + 1.69%

= 8.39%

**“ Hence, Weighted Average Cost of Capital [WACC] = 8.39%
“**

ABC Inc. recently is doing the following financing: (1) The
firm's non-callable bonds mature in 20 years, have an 6.5% Yield to
Maturity. (2) The company’s tax rate is 40%. (3) The risk-free rate
is 5%, the market return is 12%, and the stock’s beta is 1.20. (4)
(4) The target capital structure has a debt to equity ratio of 1.2.
The firm uses the CAPM to estimate the cost of common stock, and it
does not expect to issue...

ABC Inc. recently is doing the following financing: (1) The
firm's non-callable bonds mature in 20 years, have an 7.00% Yield
to Maturity. (2) The company’s tax rate is 35%. (3) The risk-free
rate is 3.5%, the market return is 12%, and the stock’s beta is
1.10. (4) The target capital structure has a debt to equity ratio
of 1.8. The firm uses the CAPM to estimate the cost of common
stock, and it does not expect to issue any...

To estimate the company's WACC, Marshall Inc. recently hired you
as a consultant. You have obtained the following information. (1)
The firm's noncallable bonds mature in 20 years, have an 8.00%
annual coupon, a par value of $1,000, and a market price of
$1,050.00. (2) The company's tax rate is 40%. (3) The risk-free
rate is 4.50%, the market risk premium is 5.50%, and the stock's
beta is 1.20. (4) The target capital structure consists of 35% debt
and the...

To estimate the company's WACC, Marshall Inc. recently hired you
as a consultant. You have obtained the following information. (1)
The firm's noncallable bonds mature in 20 years, have an 8.00%
annual coupon, a par value of $1,000, and a market price of
$1,050.00. (2) The company's tax rate is 40%. (3) The risk-free
rate is 4.50%, the market risk premium is 5.50%, and the stock's
beta is 1.20. (4) The target capital structure consists of 35% debt
and the...

Daves Inc. recently hired you as a consultant to estimate the
company’s WACC. You have obtained the following information. (1)
The firm's noncallable bonds mature in 20 years, have an 8.00%
annual coupon, a par value of $1,000, and a market price of
$1,000.00. (2) The company’s tax rate is 25%. (3) The risk-free
rate is 4.50%, the market risk premium is 5.50%, and the stock’s
beta is 1.20. (4) The target capital structure consists of 35% debt
and the...

Daves Inc. recently hired you as a consultant to estimate the
company’s WACC. You have obtained the following information. (1)
The firm's bonds have a YTM of 6%. (2) The company’s tax rate is
30%. (3) The risk-free rate is 4%, the market risk premium is 5%,
and the stock’s beta is 1.10. (4) The target capital structure
consists of 30% debt and the balance is common equity. The firm
uses the CAPM to estimate the cost of common stock,...

Daves Inc. recently hired you as a consultant to estimate the
company's WACC. You have obtained the following information. (1)
The firm's noncallable bonds mature in 20 years, have an 8.00%
annual coupon, a par value of $1,000, and a market price of
$1,000.00. (2) The company's tax rate is 25%. (3) The risk-free
rate is 4.50%, the market risk premium is 5.50%, and the stock's
beta is 1.20. (4) The target capital structure consists of 35% debt
and the...

Jeff recently hired you as a consultant to estimate the
company’s WACC. You have obtained the following information. (1)
JB's bonds mature in 25 years, have a 7.5% annual coupon, a par
value of $1,000, and a market price of $936.49. (2) The company’s
tax rate is 40%. (3) The risk-free rate is 6.0%, the market risk
premium is 5.0%, and the stock’s beta is 1.5. (4) The target
capital structure consists of 30% debt and 70% equity. JB uses...

Daves Inc. recently hired you as a consultant to estimate the
company’s WACC. You have obtained the following information. (1)
The firm's bonds have a YTM of 6%. (2) The company’s tax rate is
30%. (3) The risk-free rate is 4%, the market risk premium is 5%,
and the stock’s beta is 1.10. (4) The target capital structure
consists of 30% debt and the balance is common equity. The firm
uses the CAPM to estimate the cost of common stock,...

To estimate the company's WACC, B&H inc. recently hired you
as a consultant. You have obtained the following information. (1)
The firm's noncallable bonds mature in 15 years, have a 7.50%
annual coupon, a par value of $1,000, and a market price of
$1,110.00. (2) The company's tax rate is 34%. (3) The risk-free
rate is 3.60%, the market return is 10.50%, and the stock's beta is
1.10. (4) The target capital structure consists of 45% debt and the
balance...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 2 minutes ago

asked 7 minutes ago

asked 9 minutes ago

asked 10 minutes ago

asked 32 minutes ago

asked 33 minutes ago

asked 41 minutes ago

asked 45 minutes ago

asked 57 minutes ago

asked 57 minutes ago

asked 1 hour ago

asked 1 hour ago