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 %
