Question

What is the WACC for the following firm?

(1) its noncallable bonds mature in 20 years, have an 8.00 percent annual coupon rate, a par value of $1,000, and a market price of $1,050.00.

(2) its tax rate is 25%.

(3) The risk-free rate is 4.50%, the market risk premium is 5.50%, and the beta of its stock is 1.20.

(4) The target capital structure consists of 35% debt and the balance is common equity.

(5) The firm uses the CAPM to estimate the cost of common stock, and it does not expect to issue any new shares.

Answer 1

To calculate the WACC of the firm, we need to first calculate the cost of equity and cost of debt cost of debt PV (market price) = 1050 FV (par value)= 1000 Coupon (PMT)= 80 N (year to maturity): 20 YTM = Use financial calculator to calculate YTM 7.51% Cost of equity risk free rate + beta*Market risk premium 4.5+ 1.2*5.5 11.10% WACC = Cost of equity*weight of equity+Cost of debt*(1-Tax rate)*weight of debt 11.1*0.65+7.51*(1-0.25)*0.35 9.19