Answer:
WACC = 10.88%
Step by Step Process:
Firstly, we need to calculate the market weights of both equity and debt
Total equity = 4,000,000 * 76 = 304,000,000
Bond 1 issue = 90,000,000 *0.94 = 84,600,000
Bond 2 issue = 70,000,000 * 1.04 = 72,800,000
Total debt = 84,600,000 + 72,800,000 = 157,400,000
Total assets = 157,400 + 304,000,000 = 461,400,000
Weight of equity = We = 304/461.4 = 0.6589
Weight of bond 1 = Wb1 = 84.6/461.4 = 0.1833
Weight of bond 2 = Wb2 = 1-0.6589 -0.1833 = 0.1578
Cost of equity = Re = D1/P0 + g = 4.80*1.08/76 + 0.08 = 0.1482 = 14.82%
Cost of bond 1 = rate(nper,pmt,pv,fv) where nper = 20* 2 = 40, pmt =5% of 1000 = 50 = 25(semi annual), pv = 940 and FV =1000
Cost of bond 1= Rb1 = rate(40,25,-940,1000) *2 = 5.4983%
Cost of bond 2 = rate(nper,pmt,pv,fv) where nper = 3* 2 = 6, pmt =6% of 1000 = 60 = 30(semi annual), pv = 1040 and FV =1000
Cost of bond 2 = Rb2 =rate(6,30,-1040,1000)*2 = 4.5583%
WACC = We* Re + Wb1* Rb1*(1-tax rate) + Wb2*Rb2 *(1-tax rate) { Since debt has tax advantage}
WACC = 0.6589*14.82% + 0.1833 * 5.4983% *(1-0.35) + 0.1578*4.5583%*(1-0.35)
WACC = 10.8875%
WACC = 10.88%
