Question

5,000 7.5 percent coupon bonds outstanding, $1,000 par value, 19 years to maturity, selling for 105 percent of par; the bonds make semiannual payments. Common stock: 105,000 shares outstanding, selling for $63 per share; the beta is 1.13. Preferred stock: 15,500 shares of 6 percent preferred stock outstanding, currently selling for $107 per share. Market: 9 percent market risk premium and 6 percent risk-free rate. Assume the company's tax rate is 31 percent. Find the WACC.

Answer 1

Answer:

10.53%

Explanation:

WACC = wE*rE + wP*rP + wD*rD(1-tax)

Market values;

Debt = 1.05 *5,000*1000 = 5,250,000

Preferred stock = 15,500 *107 = 1,658,500

Common equity = 105,000 *63 = 6,615,000

Total market value = 13,523,500

wE = 6,615,000/ 13,523,500 = 0.4891

wP= 1,658,500/13,523,500 = 0.1226

wD = 5,250,000/13,523,500 = 0.3882

Cost of capital;

Cost of common equity, rE using CAPM;

rE = 0.06 + (1.13*0.09) = 0.1617

rE = 16.17%

Cost of preferred stock = 6%

Cost of debt

using a financial calculator, input the following; N= 38, PV = -1050, PMT = 37.5,

FV =1000, then CPT I/Y = 3.51% . So annual rate = 3.51% *2 = 7.02%

WACC = (0.4891*0.1617) +(0.1226* 0.06) + [0.3882 *0.0702(1-0.31)]

WACC = 0.0791 + 0.007356 + 0.0188

WACC = 0.1053 or 10.53%