Question

To estimate the company's WACC Marshall, Inc. recently hired you as a consultant. You have obtained the following information. (1) The firm's noncallable bonds mature in 20 years, have an 8% annual coupon, a par value of $1000, and a market price of $1050. (2) The company's tax rate is 25%. (3) The risk rate is 4.50%, the market risk premium is 5.50%, and the stocks beta is 1.20. (4) The target capital structure consists of 35% debt and the balance is common equity. The firm uses CAPM to estimate the cost of common stock, and it does not expect to issue any new shares. What is it's WACC? a. 8.73 b.8.29 c.7.88 d.9.19

Answer 1

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Answer: Option D

Working:

Amway Calculation of warc of Marshall Inc. 1) calculation of cost of Equity (CAPM) Risk full nate & Beta x macket wish Benim 4.50 7. + 1.20 * 5.Soy. 4.50 t 6.60 7. 11.10 Calculation of cost of Debt (Bond) Prie - Internt & PUAF (yamin) & Maturty valeux PUF CYTM ,n) colun YM : Cost of subt - na Pensil ? Usine IRR Technique AT Y7M = 8x Prie & Pan value - $ 1000 (because Coupon nate z YTM)

AT YTM = 74. mu'87. X 1000 X PUAF 20) + 1000 x PUF (19.,20) : 80 X 10.5940 1ooox 0.2584 I 84752 + 258.40 = $ 1105-92 Interpolation yram : clown note of Phuat - Current loweate Pnee x (Hr) Pheat Pheret e lower date higher nate 71%. + $1105.92 - $1080 (8-7) 7. 1105.92 - $1000 : 1 y, + S$ {2 x 13, 105.92 77. +0.5.3 % • = 7.53

=> WACC = [ 7.53% ( 1 - 25%) * 35%] + [ 11.10% * 6.5% ]

= 1.97665 + 7.215%

= 9.19%