Question

Daves Inc. recently hired you as a consultant to estimate the company's WACC. You have obtained the following information. (1) The firm's noncallable bonds mature in20 years, have an 8.00% annual coupon, a par value of $1,000, and a market price of $1,050.00. (2) The company's tax rate is 40%. (3) The risk-free rate is 4.50%, themarket risk premium is 5.50%, and the stock's beta is 1.20. (4) The target capital structure

Answer 1

Calculating the YTM using excel sheet:

Select function in that finance and then Enter the values as Nper = 20; PMT = -80; PV = 1050; FV = -1000 then you get the value "7.51%"(YTM)

YTM is the pre-tax cost of debt so calculate the value of after-tax cost of debt:

After-tax cost of debt = Pre-tax cost of debt (1 - Tax rate)

= 7.51% (1-0.40)

= 0.0751 (0.60)

= 0.04506 or 4.506%

Calculating the cost of equity using CAPM :

Re = Rf + Beta [E(Rm) - Rf]

= 0.045 + 1.20 [0.055]

= 0.045 + 0.066

= 0.111 or 11.1%

Therefore, the cost of equity is 11.1%

Calculating WACC from the following equation:

WACC = Wd * Rd + We * Re

Wd is the weight of debt

Rd is the after-tax cost of debt

We is the weight of equity

Re is the Cost of equity

WACC = 0.35 * 0.04506 + 0.65 * 0.111

= 0.01577 + 0.07215

= 0.08792 or 8.79%

Therefore, the weighted average cost of capital is 8.79%

You not give full question in point 4 please check it once