Question

Adjusted WACC Hollydale's is a clothing store in East Park. It paid an annual dividend of $2.70 last year to its shareholders and plans to increase the dividend annually at 5.0%. It has 540,000 shares outstanding. The shares currently sell for $17.87 per share. Hollydale's has 12,000 semiannual bonds outstanding with a coupon rate of 11.5%, a maturity of 18 years, and a par value of $1,000. The bonds are currently selling for $1,391.61 per bond. What is the adjusted WACC for Hollydale's if the corporate tax rate is 25%? What is the adjusted WACC for Hollydale's if the corporate tax rate is 25%? % (Round to two decimal places)

Answer 1

	Value	Weight	Cost
Debt	16,699,320	63.4%	7.50%
Stock	9,649,800	36.6%	20.86%
Total	26,349,120	WACC	11.21%

Value = No. of shares x Price

Weight = Value / Total

Cost of debt can be calculated using I/Y function on a calculator

N = 18 x 2 = 36, PMT = 11.5% x 1000 / 2, PV = -1,391.61, FV = 1,000

=> Compute I/Y = 3.75% (semi-annual)

Annual = 3.75% x 2 = 7.50%

Cost of stock, re = D x (1 + g) / P + g = 2.7 x (1 + 5%) / 17.87 + 5% = 20.86%

WACC = 63.4% x 7.50% x (1 - 25%) + 36.6% x 20.86% = 11.21%