Answer:
10.45%
Explanation:
First find the cost of equity for the company
RE = [$4.60*(1.05) / $74] + 0.05
RE = 0.1153, or 11.53%
Then find the YTM on both bond issues
P1 = $950 = $45*PVIFA(R%,48) + $1,000*PVIF(R%,48)
R = 4.767%
YTM = 4.767%×2
YTM = 9.53%
P2 = $1,080 = $50*PVIFA(R%,16) + $1,000*PVIF(R%,16)
R = 4.298%
YTM = 4.298%×2
YTM = 8.60%
Total Debt = 0.95($80,000,000) + 1.08*($60,000,000)
Total Debt = $140,800,000
Weight of D1 = 76,000,000 / 140,800,000
Weight of D1 = 0.5398
Weight of D2 = 64,800,000 / 140,800,000
Weight of D2 = 0.4602
Weighted Average after-tax cost of debt
RD = (1 – 0.35)*[(0.5398)*(0.0953) + (0.4602)(0.086)]
RD = .0592, or 5.92%
Market value of equity = 8,000,000*($74) = $592,000,000
Market value of debt = $140,800,000
Total market value of the company = $592,000,000 + 140,800,000 = $732,800,000
Weights of equity and debt
E/V = $592,000,000 / $732,800,000 = 0.8079
D/V = 1−E/V = 0.1921
WACC = 0.8079(0.1153) + 0.1921(0.0592)
WACC = 0.1045, or 10.45%