Question

Adjusted WACC. Thorpe and Company is currently an​ all-equity firm. It has three million shares selling for $32 per share. Its beta is 1.3, and the current risk-free rate is 4.1%. The expected return on the market for the coming year is 13.7%. Thorpe will sell corporate bonds for ​$32,000,000 and retire common stock with the proceeds. The bonds are​ twenty-year semiannual bonds with a 12.3% coupon rate and a $1,000 par value. The bonds are currently selling for $1,113.06 per bond. When the bonds are​ sold, the beta of the company will increase to 1.7.

What was the WACC of Thorpe and Company before the bond​ sale?

What is the adjusted WACC of Thorpe and Company after the bond sale if the corporate tax rate is 40%?

Answer 1

o calculation of ware of thospe and company go before the band sale 1. One Before and sale, the thoope & co is all equity fiam. so, WACC = We x ke + wd.xtd. ) ( wheree ke = cost of equity kd e cost of debt's po vest weight of equite e weight of debt. => calculation of cost of equity brodo ke c Rf +8 [Rm-RfI Ahorro Rf = risk free rate . Rm = market returi 4.1.4.413 (13.7-4.1) -) (16.58.1.) . There fox WACC =) 1x 16.58). toxo a [16.587.)

Thoup & 9 calculation of company after adjusted ware of the band sale after the band sale . ß is increased to 17 so that cost of equity is also changes. New cost of equity on the Oza ke a Rp + ß [Rm=Rf] 80 ) 4.1 + 1.7 (13.7-4.1] =) 20.48.1 and find debt out is also raised, so we have to .. cost of debt (ked) company is issung 20 years semi annual coupon band with 12.3%. coupon rate cwrant selling price = 113.06 $ . Here yield to maturity [YM] is nothing but cost of debt fran company point of view - Uz there are 20 years semi annual bonds. 30 that an a spawn of 20 years, theree are 40 periods [20x2 half periods] couper amont per period = 1,000x19.34.x/=) C15

YTM bole walioko doo ira fredeemable - Punchose ? = coupon amount + value . moice life of bond J loth of redeemable valve t pusclese price assume, gedeemable value = 1,000 et par = + r 1000 - 1,13.06 40 L ( 1,000 + !!13.06 ) → 58.6935 =) 0.055534 1056,53 annualized yTM = 0.095534 x 12 € which =) 0.111068 : 0:1 ) 11.1068 =) 111.11.7.) . . led a 11.11%.' . we have to calculate weights v a The retione proceeds of common to bonds stock. are s used tolt a

proceeds of bonds. =) * 3,20,00,000 (n market price of Shane -> +32 . . no of shores pochesed = 3, 20,00,0000 32 There lore SU market v : )!. 10,60,000. sheres therefore market vake of equity now. c. o 20,00,000 shares x 35 - 6,40,00,000 [3million- 1 million] market value of debt =) 320,00,000 weight of debt Debt 320,00,000 debt #equity 3,20,00,000 + 6,40,000000 -) 0.33) weight of equity ay lo weight of debt 1-0.33 6,40,00000 --> 0.67 OH) Equite debt tequity a G, AC 9,60,00,000

after far cost of debt =) 1.11) [1-0:40] 5484 -) (6.67) adjusted wACC after here te sake =) wexke twaxka =) 0.67 x 20.42 + 0.33 x6:67.). =) 15.68 1