Question

The Saunders Investment Bank has the following financing outstanding.

Debt:	160,000 bonds with a coupon rate of 12 percent and a current price quote of 113; the bonds have 20 years to maturity. 330,000 zero coupon bonds with a price quote of 15.5 and 30 years until maturity. Both bonds have a par value of $1,000. Assume semiannual compounding.
Preferred stock:	250,000 shares of 10 percent preferred stock with a current price of $66, and a par value of $100.
Common stock:	3,600,000 shares of common stock; the current price is $52, and the beta of the stock is .85.
Market:	The corporate tax rate is 40 percent, the market risk premium is 7 percent, and the risk-free rate is 4 percent.

What is the WACC for the company?

*Please respond with Excel formulas! Thank you!

Answer 1

Calculate the WACC as follows: B Particulars After tax cost of debt' 1 After tax cost of zero coupon bond Preferred stock Cost of equity Rate Amount Weight Weight rate 6.2634% $180,800,000.00 41.50121% 2.59938% 3.7872% $51,150,000.00 11.74108% 0.44466% 15.1515% $16,500,000.00 3.78744% 0.57386% 9.9500% $187,200,000.00 42.97027% 4.27554% $435,650,000.00 1 7.89% WACC Formulas:

Particulars Rate After tax cost of debt' =RATE(20*2,1000*12%/2,-1000*113%, 1000)*2*(1-40%) After tax cost of zero coupon bond |=RATE(30*2,,-1000*15.5%, 1000)*2*(1-40%) Preferred stock =(100*10%)/66 Cost of equity -4%+0.85*7%) E Amount Weight Weight rate =1000*113%*160000 =D65/D69 =C65*E65 =1000*15.5%*330000 =D66/D69 =C66*E66 =250000*66 =D67/D69 =C67*E67 =3600000*52 =D68/D69 =C68*E68 =SUM(D65:D68) =SUM(E65:E68) =SUM(F65:F68) WACC