when collins inc. uses the proceeds from issuing bonds to purchase equipment needed to start a new product line, this is an exam
1 answer:
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Answer:
WACC 6.18%
Explanation:
to get the cost of capital we solve using the gordon model:
D1 1.55
P 28
f 0.00
g 0.02
Ke 0.075357143
Then for the cost of debt, we need to calculate the YTM of the bonds:
which is the rate at which the present value of the coupon payment and maturity equals the market price:
For the complexity this is done with excel or a financial calculator there is also an approximation formula
YTM with excel: 0.073516565
now that we good this we need to determinate the weigth of equity and debt:
250,00 shares x 28 dollars each = 7,000,000
1,500 bonds of $1,000 each at 98% = 7,350,000
value of the company: 7,000,000 + 7,350,000 = 14,350,000
Ew: 7,000,000 / 14,350,000 = 0.487804878
Dw: 7,350,000 / 14,350,000 =0.512195122
Now we got all values and we can determinate the WACC:
Ke 0.075357143
Equity weight 0.487804878
Kd 0.074
Debt Weight 0.512195122
t 0.34
WACC 0.0617752 = 6.18%