Question

Hero Manufacturing has 8.6 million shares of common stock outstanding. The current share price is $76 and the book value per share is $3. The company also has two bond issues outstanding. The first bond issue has a face value of $75 million, a coupon rate of 6.7 percent and sells for 108.7 percent of par. The second issue has a face value of $60.3 million, a coupon rate of 7.9 percent and sells for 112.5 percent of par. The first issue matures in 7 years, the second in 23 years.

Suppose the company’s stock has a beta of 1.1. The risk-free rate is 2.9 percent and the market risk premium is 7 percent. Assume that the overall cost of debt is the weighted average implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 23 percent. What is the company’s WACC? Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places.

Answer 1

Cost of equity = 10.60% 0.029+(1.1*0.07) RATE(7*2,1000*0.067/2,-1087,1000) *2*(1-0.23) After tax cost of First issue: 4.00% RATE(23 2,79/2,-1125, 1000) *2*(1-0.23) After tax cost of second issue: 5.25% Market value weight (amount/total) weight x ytm Particulars After tax cost of debt amount $81.53 first issue 4.00% 0.5458 0.021859963 $67.84 5.25% second issue 0.4542 0.023836723 4.57% $149.36 Total After tax of debt weighted cost weight Particulars Market value cost $653.60 10.60% Equity 0.81399 0.086282485 $149.36 Debt 4.57% 0.18601 0.008500237 9.48% WACC $802.96