Question

You are looking at the following information: Debt: Common stock: 5,000 6.5 percent coupon bonds outstanding, $1,000 par value, 19 years to maturity, selling for 105 percent of par; the bonds make semiannual payments. 125,000 shares outstanding, selling for $59 per share; the beta is 1.15. 16,500 shares of 5.5 percent preferred stock (review my Ch.8 slide 43: what does "...% preferred stock" phrase mean?) outstanding, currently selling for $107 per share. 7.5 percent market risk premium and 5 percent risk-free rate. Preferred stock: Market: The company is in the 32 percent tax rate bracket based on its corporate income. Required: Find the WACC. (Do not round your intermediate calculations.)

Answer 1

Step-1:Calculation of Weight of each component of capital
Market Value of debt	=	5,000	*	$             1,000	*	105%	=	$     52,50,000
Market Value of common stock	=	1,25,000	*	$                   59			=	$     73,75,000
Market Value of preferred stock	=	16,500	*	$                 107			=	$     17,65,500
Total								$ 1,43,90,500
Weight of :
Debt		$ 52,50,000	/	$ 1,43,90,500	=	0.36482402
Common stock		$ 73,75,000	/	$ 1,43,90,500	=	0.51249088
Preferred stock		$ 17,65,500	/	$ 1,43,90,500	=	0.1226851
Total						1.00000
Step-2:Calculation of cost of each component
Before tax cost of debt	=	=rate(nper,pmt,pv,fv)*2		Where,
	=	6.05%		nper	=	38
				pmt	=	$         32.50
				pv	=	$ -1,050.00
				fv	=	$   1,000.00
After tax cost of debt	=	6.05%	*(1-0.32)
	=	4.12%
Cost of common stock	=	Risk free rate + Beta*market risk premium
	=	5%+1.15*7.5%
	=	13.63%
Cost of preferred stock	=	Annual dividend	/	Current Selling Price
	=	$            5.50	/	$           107.00
	=	5.14%
Step-3:Calculation of WACC
		Weight	Cost
		a	b	c=a*b
Debt		0.36482402	4.12%	1.50%
Common stock		0.51249088	13.63%	6.98%
Preferred stock		0.1226851	5.14%	0.63%
Total				9.12%
So,
WACC is 9.12%