Question

Masterson, Inc., has 8 million shares of common stock outstanding. The current share price is $68, and the book value per share is $7. The company also has two bond issues outstanding. The first bond issue has a face value of $65 million, has a coupon rate of 5 percent, and sells for 93 percent of par. The second issue has a face value of $50 million, has a coupon rate of 4 percent, and sells for 105 percent of par. The first issue matures in 23 years, the second in 8 years. Suppose the most recent dividend was $4.20 and the dividend growth rate is 4.3 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 24 percent. What is the company's WACC? (Do not round Intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g. 32.16.)

Answer 1

Answer:

WACC=9.26%

Explanation:

Calculation for the company's WACC

First step is to calculate the Total Market Value

Total Market Value = 8,000,000*68+ 65,000,000*93% + 50,000,000*105%

Total Market Value = 544,000,000+60,450,000+52,500,000

Total Market Value = $656,950,000

Second step is to calculate the % Value of Equity,% Value of First Bond and % Value of Second Bond

% Value of Equity =544,000,000/$656,950,000*100

% Value of Equity = 82.81%

% Value of First Bond = 60,450,000/$656,950,000*100

% Value of First Bond= 9.20%

% Value of Second Bond = 52,500,000/$656,950,000*100

% Value of Second Bond =7.99%

Third step is to calculate Ke Using this formula

Ke = Cost of Equity = Dividend/Market Value per share + Growth Rate

Let plug in the formula

Ke = 4.2/68 + 4.3%

Ke= 6.18% + 4.3%

Ke= 10.48%

Last step is to calculate WACC using this formula

WACC = % Value of Equity * Cost of Equity + % Value of Debt * Cost Of Debt (1- Tax Rate)

Let plug in the formula for

WACC= 82.81% * 10.48% + 9.20% * 5% (1-0.24) + 7.99%* 4%(1-0.25)

WACC= 8.67%+ 9.20% * 5%(0.76)+7.99%* 4%(0.76)

WACC= 8.67%+ 9.20% * 3.8%+7.99%* 3.04%

WACC=8.67%+0.35%+0.24%

WACC=9.26%

Therefore the company's WACC will be 9.26%