Answer:
WACC = 8.84%
Explanation:
Face value= $ 1000 (assume)
Current price = 1000* 109% = 1090
semianual interest =1000 *.066*6/12 = 33
semiannual months = 20 *2 = 40
Yield to maturity of bonds = [semiannual interest +(face value -current price) /months]/[(face value+price)/2]
= [33 + (1000- 1090 )/40 ]/[(1000 +1090)/2]
= [33 + (-90/40) ] / [2090 /2]
= [33 - 2.25 ] /1045
= 30.75 /1045
= .0294 or 2.94% semiannually or (2.94*2) =5.88 % annually
After tax cost of debt = 5.88 (1- .40 ) = 3.528 %
Market value of bond = 1090 *5000 = $ 5450000
b)cost of equity =Rf +[beta*market premium ]
= 4.6 + [1.12 * 5]
= 4.6 + 5.6
= 10.20 %
market value of equity = 380000*56 =$ 21280000
Total market value of debt and equity =5450000 +21280000
= $ 26730000
weight of debt = 5450000/26730000 = .2039
weight of equity = 21280000 /26730000 = .7961
WACC = (after tax cost of debt *WD)+(cost of equity *We)
= (3.528 * .2039 )+(10.20 * .7961)
= .7194 + 8.1202
= 8.84%
