Question

A bond has a coupon rate of 6 percent and the bond makes semiannual coupon payments. The dollar amount of coupon interest received every six months isa.$60.b.$30.c. $30 plus or minus the prorate portion of the discount or premium that the bond was purchased for.d.None of the above.2.) Using the WACC in practice: Ronnie’s Comics has found that its cost of common equity capital is 15 percent and its cost of debt capital is 12 percent. If the firm is financed with $250,000,000 of common shares (market value) and $750,000,000 of debt, then what is the after-tax weighted average cost of capital for Ronnie’s if it is subject to a 35 percent marginal tax rate?
a.) 6.05%
b.) 9.60%
c.) 8.75%d
.) 13.65%

Answer 1

Answer:

Explanation:

1. ) A bond that pays coupons is referred to as a coupon paying bond while that which doesn't pay coupons is known as a Zero-coupon bond.

The bond you are given bond has an annual coupon rate of 6% paid semiannually means that it will pay (6% / 2) = 3% every 6 months.

Semiannual coupon payment = semiannual coupon rate * Face value

The standard face value of a bond is $1000, therefore,

Semiannual coupon payment = 3%*1000 = $30

2.) WACC is weighted average cost of capital that takes into consideration the leverage effects of adding debt into a company's capital structure.

The formula for calculating WACC = wE*rE + wD*rD(1-tax)

wE = weight of equity = 250,000,000/1,000,000,000 = 0.25 or 25%

rE = cost of equity = 15% or 0.15 as a decimal

wD = weight of debt = 750,000,000/1,000,000,000 = 0.75 or 75%

rD = pretax cost of debt = 12% or 0.12 as a decimal

WACC = (0.25 *0.15) + [ 0.75*0.12(1-0.35) ]

= 0.0375 + 0.0585

= 0.096 or 9.6%

Therefore, WACC is 9.60%