Question

White Chain Print L... t em' straight bik.. Save & E Saved Help Johnny Cake Ltd. has 14 million shares of stock outstanding selling at $19 per share and an issue of $70 million in 8 percent annual coupon bonds with a maturity of 18 years, selling at 94.5 percent of par. The Par Value of each bond is $1,000. Assume Johnny Cake's weighted-average tax rate is 34 percent, its next dividend is expected to be $3 per share, and all future dividends are expected to grow at 4 percent per year, indefinitely What is its WACC? (Do not round intermediate cealculations. Round your finel answer to 2 decimal places.) WACC %

Answer 1

WACC = (weight of debt * cost of debt) + (weight of common stock * cost of common stock)

market value of debt = face value * market price

market value of debt = $70,000,000 * 94.5% = $66,150,000

market value of common stock = shares outstanding * market price per share

market value of common stock = 14,000,000 * $19 = $266,000,000

total market value = $66,150,000 + $266,000,000 = $332,150,000

weight of debt = market value of debt / total market value

weight of debt = $66,150,000 / $332,150,000 = 0.20

weight of common stock = market value of common stock / total market value

weight of equity = $266,000,000 / $332,150,000 = 0.80

cost of debt = YTM of bond * (1 - tax rate)

YTM is calculated using RATE function in Excel with these inputs :

nper = 18*2 (18 years to maturity with 1 annual coupon payment each year)

pmt = 1000 * 8% (annual coupon payment = face value * annual coupon rate. This is a positive figure as it is an inflow to the bondholder)

pv = -1000 * 94.5% (current bond price = face value * market price. This is a negative figure as it is an outflow to the buyer of the bond)

fv = 1000 (face value of the bond receivable on maturity. This is a positive figure as it is an inflow to the bondholder)

The RATE is calculated to be 8.61%. This is the YTM.

cost of debt = YTM * (1 - tax rate)

cost of debt = 8.40% * (1 - 34%) ==> 5.68%

f =RATE(18,1000*8%,-1000*94.5%,1000)*(1-34%) D F G B C il 5.68%

cost of equity = (next year dividend / current share price) + constant growth rate

cost of equity = ($3 / $19) + 0.04 = 19.79%

WACC = (weight of debt * cost of debt) + (weight of common stock * cost of common stock)

WACC = (0.20 * 5.68%) + (0.80 * 19.79%)

WACC = 16.98%