Problem 13-9 Calculating the WACC Hero Manufacturing has 8.3 million shares of common stock outstanding. The current share price is $79 and the book value per share is $4. The company also has two bond issues outstanding. The first bond issue has a face value of $85 million, a coupon rate of 6.4 percent and sells for 108.1 percent of par. The second issue has a face value of $65.8 million, a coupon rate of 7.6 percent and sells for 111.9 percent of par. The first issue matures in 8 years, the second in 26 years. Suppose the company’s stock has a beta of 1.2. The risk-free rate is 3.6 percent and the market risk premium is 6.7 percent. Assume that the overall cost of debt is the weighted average 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.)
WAAC ??? %
MV of equity=Price of equity*number of shares outstanding |
MV of equity=79*8300000 |
=655700000 |
MV of Bond1=Par value*bonds outstanding*%age of par |
MV of Bond1=1000*85000*1.081 |
=91885000 |
MV of Bond2=Par value*bonds outstanding*%age of par |
MV of Bond2=1000*65800*1.119 |
=73630200 |
MV of firm = MV of Equity + MV of Bond1+ MV of Bond 2 |
=655700000+91885000+73630200 |
=821215200 |
Weight of equity = MV of Equity/MV of firm |
Weight of equity = 655700000/821215200 |
W(E)=0.7985 |
Weight of debt = MV of Bond/MV of firm |
Weight of debt = 165515200/821215200 |
W(D)=0.2015 |
Cost of equity |
As per CAPM |
Cost of equity = risk-free rate + beta * (Market risk premium) |
Cost of equity% = 3.6 + 1.2 * (6.7) |
Cost of equity% = 11.64 |
Cost of debt |
Bond1 |
K = Nx2 |
Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k] + Par value/(1 + YTM/2)^Nx2 |
k=1 |
K =8x2 |
1081 =∑ [(6.4*1000/200)/(1 + YTM/200)^k] + 1000/(1 + YTM/200)^8x2 |
k=1 |
YTM1 = 5.1517571738 |
Bond2 |
K = Nx2 |
Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k] + Par value/(1 + YTM/2)^Nx2 |
k=1 |
K =26x2 |
1119 =∑ [(7.6*1000/200)/(1 + YTM/200)^k] + 1000/(1 + YTM/200)^26x2 |
k=1 |
YTM2 = 6.63 |
Firm cost of debt=YTM1*(MV bond1)/(MV bond1+MV bond2)+YTM2*(MV bond2)/(MV bond1+MV bond2) |
Firm cost of debt=5.1517571738*(91885000)/(91885000+73630200)+6.63*(91885000)/(91885000+73630200) |
Firm cost of debt=5.81% |
After tax cost of debt = cost of debt*(1-tax rate) |
After tax cost of debt = 5.81*(1-0.25) |
= 4.3575 |
WACC=after tax cost of debt*W(D)+cost of equity*W(E) |
WACC=4.36*0.2015+11.64*0.7985 |
WACC =10.173% |
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