Debt: 7,000 6.8 percent coupon bonds outstanding, $1,000 par years to maturity, selling for 104 percent of par; the semiannual payments. Common stock: 400,000 shares outstanding, selling for $58 per share; th 1.14. Market: 7 percent market risk premium and 4.8 percent risk-free r What is the company's WACC?

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cancinodavidq cancinodavidq · Answer 1 · 2019-12-09T19:29:37+01:00

Answer:

WACC = 10.50 %

Explanation:

(‘1) Calculation of cost of debt- Cost of debt is nothing but yield to maturity of bond

Yield to maturity is nothing but the rate of return at which all future cash flows will become equal to current market price.

Current Market Price = PV of Coupon payments + PV of FV of bond

1040= 34 [ 1- (1+0.5 YTM)-2 x 30 / 0.5 YTM] + 1000 / ( 1+0.5 YTM )2 x30

YTM = 6.5 %

So cost of debt Rd = 6.5 %

(‘2) Cost of Preferred stock

Rps = Dps / Price

Rps = 5/78 = 6.41 %

(3) Cost of Common Stock

Rs = Risk Free rate + Beta x Market Risk Premium

Rs = 4.80 + 1.14 x 7

Rs = 12.78 %

4. Check the image attached.

WACC = 10.50 %

WACC= Wd x Rd x ( 1- Tax rate) + Wps x Rps + WCE x Rs

Post Tax Debt cost will be considered in WACC

Post Tax cost of debt= Cost x ( 1- Tax Rate )

Post Tax Cost = 6.5 x ( 1-0.38) = 4.03 %