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icore: U OT 10 pts JUL 12 15 LU X Instructor-created question Question Help Comida corp. is a grocery store located in the midwest. It paid an annual dividend of $2.50 last year to its shareholders and plans to increase the dividend annually at 3.0% forever. It has 600,000 shares outstanding. The shares currently sell for $21.25 per share. Comida Corp, has 20,000 semiannual bonds outstanding with a coupon rate of 7%, a maturity of 25 years, and a par value of $1,000. The bonds currently have a yield to maturity (YTM) of 8% per bond. What is the adjusted WACC for Comida Corp. if the corporate tax rate is 25%? What is the adjusted WACC for Comida corp. If the corporate tax rate is 25%? % (Round to two decimal places.)

Answer 1

Cost of equity= D1/Price+ growth rate

= 2.5*103%/21.25+3%

=15.12%

Market value of equity= number of shares* price

= 600000*21.25=12750000

Cost of debt= YTM*(1-Tax) = 8%*(1-25%) = 6%

Using financial calculator

Input: FV= 1000,N=25*2=50, PMT=7%*1000/2=35, I/Y=8/2=4

Solve for PV as -892.59

Market value of debt= number of bonds* price

= 20000*892.59 = 17851800

WACC= cost of equity*weight+cost of debt*weight

= 15.12%*12750000/(12750000+17851800)+6%*17851800/(12750000+17851800)

= 9.8%