Question

Masterson, Inc., has 8 million shares of common stock outstanding. The current share price is $74, 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 $95 million, has a coupon rate of 7 percent, and sells for 97 percent of par. The second issue has a face value of $80 million, has a coupon rate of 6 percent, and sells for 109 percent of par. The first issue matures in 23 years, the second in 6 years. Suppose the most recent dividend was $4.50 and the dividend growth rate is 4.9 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 25 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.) WACC

Answer 1

Total Market Value = 8000000*74 + 95000000*97% + 80000000*109% = 771350000

% Value of Equity = 592000000/771350000*100 = 76.75%

% Value of First Bond = 92150000/771350000*100 = 11.95%

% Value of Second Bond = 87200000/771350000*100 = 11.30%

Ke = Cost of Equity = Dividend/Market Value per share + Growth Rate = 4.5/74 + 4.9% = 6.08% + 4.9% = 10.98%

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

= 76.75% * 10.98% + 11.95% * 7% (1-0.25) + 11.30%* 6%(1-0.25)

= 8.42%+ 0.63% + 0.51%

=9.56%