Homework Answers
| a] | Before tax cost of debt = YTM | ||||
| YTM [using a calculator] = 8.00% | |||||
| After tax cost of debt = 8%*(1-40%) = | 4.80% | ||||
| Cost of preferred stock = 11/105 = | 10.48% | ||||
| Cost of common equity per CAPM = 5%+1.2*6% = | 12.20% | ||||
| b] | The WACC using market values is calculated in table below: | ||||
| Component | Market Value in $ millions | Weight | Component Cost | WACC | |
| Debt [20*86.58%] | $ 17.316 | 29.95% | 4.80% | 1.44% | |
| Preferred stock = 10*105% = | $ 10.500 | 18.16% | 10.48% | 1.90% | |
| Common stock = 1 million*30 = | $ 30.000 | 51.89% | 12.20% | 6.33% | |
| $ 57.816 | 9.67% | ||||
| WACC = 9.67% | |||||
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