Question

40. Ma, Inc. has a market value capital structure of 30% debt and 70% equity. The tax rate is 40%. The firm's bonds currently trade in the market for $930. These bonds have a par value of $1,000, coupon rate of 8% paid semiannually, and 10 years remaining to maturity. The firm's common stock trades for $20 per share. The firm has just paid a dividend of $2. Future dividends are expected to grow at 3% per year. Based on this information, Ma, Inc.'s WACC is problem rounded to 2 decimal places). %. (Record your answer for this

Answer 1

rE = [{D0 * (1 + g)} / P0] + g

= [{$2 * (1 + 0.03)} / $20] + 0.03 = 0.103 + 0.03 = 0.133, or 13.30%

To find the rD, we need to put the following values in the financial calculator:

N = 10*2 = 20;

PV = -930;

PMT = (8%/2)*1000 = 40;

FV = 1000;

Press CPT, then I/Y, which gives us 4.54

Periodic Rate = 4.54%

So, rD = Periodic Rate * No. of compounding periods in a year = 4.54% * 2 = 9.08%

WACC = [wD * rD * (1 - t)] + [wE * kE]

= [0.30 * 9.08% * (1 - 0.40)] + [0.70 * 13.30%]

= 1.63% + 9.31% = 10.94%