Question

Debt: 5,000 7.2 percent coupon bonds outstanding, $1,000 par value, 30 years to maturity, selling for 108 percent of par; the bonds make semiannual payments. Common stock: 440,000 shares outstanding, selling for $62 per share; the beta is 1.05. Market: 11 percent market risk premium and 5.2 percent risk-free rate. What is the company's WACC?

Answer 1

Answer:

the company's WACC is 15.07 %.

Explanation:

WACC = ke × (E/V) + kd × (D/V)

kd = cost of debt

Pv = $1,000 × 108% = - $1,080

n = 30 × 2 = 60

pmt = ($1,000 × 7.2 %) ÷ 2 = $36

p/yr = 2

Fv = $1,000

r = ?

Using a Financial Calculator, the Pre-tax cost of debt, r is 6.5852 or 6.59 %

After tax cost of debt = Interest × (1 - tax rate)

I will use the pre-tax  cost of debt for now since i do not have the tax rate on this question.

ke = cost of equity

    = Return on Risk free security + Beta × Market Risk Premium

    = 5.20 % + 1.05 × 11.00 %

    = 16.75 %

E/V = Market Weight of Equity

      = (440,000 × $62) / (440,000 × $62 + 5,000 × $1,080) × 100

      = 83.48 %

D/V = Market Weight of Debt

      = (5,000 × $1,080) / (440,000 × $62 + 5,000 × $1,080) × 100

      = 16.52 %

WACC = 16.75 % × 83.48 % + 6.59 % × 16.52 %

           = 15.07 %