Common Stock information |
Bond Information |
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The market value of John’s stock represents 50% of the external financing, and bonds represent the other 50%. John’s tax rate is 0%, so after-tax cost of debt = before-tax cost of debt (therefore, no adjustment needed for tax).
Calculate John’s weighted average cost of capital.
Cost of equity = Risk free rate of return + beta(Market risk
premium)
=3.9% + 0.98(7.6%)
=3.9% + 7.45%
= 11.35%
Cost of debt = YTM = Interest +(Face value -current market
price/n) / (Face value + current market price/2)
Interest = $90
Par value = $1000
Current price = $1016
n = no of year till maturity = 8
Thus cost of debt = 90 +(1000-1016/8) / (1000+1016)/2
=90+(-16/8) / 2016/2
= 90 - 2 / 1008
= 88 /1008
= 0.0873
i.e 8.73%
Statement showing WACC
Particulars | Weight | Cost of capital | WACC |
a | b | c =axb | |
Equity | 50% | 11.35% | 5.68% |
Debt | 50% | 8.73% | 4.37% |
WACC | 10.04% |
Thus WACC = 10.04%
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