Question

Raymond Mining Corporation has 9.1 million shares of common stock outstanding, 350,000 shares of 4% $100 par value preferred stock outstanding, and 155,000 7.50% semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $39 per share and has a beta of 1.55, the preferred stock currently sells for $95 per share, and the bonds have 10 years to maturity and sell for 110% of par. The market risk premium is 7.9%, T-bills are yielding 5%, and Raymond Mining’s tax is 40%.

WACC?

Answer 1

Debt:

Number of bonds outstanding = 155,000
Face Value = $1,000

Current Price = 110% * $1,000
Current Price = $1,100

Value of Debt = 155,000 * $1,100
Value of Debt = $170,500,000

Annual Coupon Rate = 7.50%
Semiannual Coupon Rate = 3.75%
Semiannual Coupon = 3.75% * $1,000
Semiannual Coupon = $37.50

Time to Maturity = 10 years
Semiannual Period to Maturity = 20

Let Semiannual YTM be i%

$1,100 = $37.50 * PVIFA(i%, 20) + $1,000 * PVIF(i%, 20)

Using financial calculator:
N = 20
PV = -1100
PMT = 37.50
FV = 1000

I = 3.073%

Semiannual YTM = 3.073%
Annual YTM = 2 * 3.073%
Annual YTM = 6.146%

Before-tax Cost of Debt = 6.146%
After-tax Cost of Debt = 6.146% * (1 - 0.40)
After-tax Cost of Debt = 3.688%

Preferred Stock:

Number of shares outstanding = 350,000
Current Price = $95

Annual Dividend = 4% * $100
Annual Dividend = $4

Value of Preferred Stock = 350,000 * $95
Value of Preferred Stock = $33,250,000

Cost of Preferred Stock = Annual Dividend / Current Price
Cost of Preferred Stock = $4 / $95
Cost of Preferred Stock = 4.211%

Common Stock:

Number of shares outstanding = 9,100,000
Current Price = $39

Value of Common Stock = 9,100,000 * $39
Value of Common Stock = $354,900,000

Cost of Common Stock = Risk-free Rate + Beta * Market Risk Premium
Cost of Common Stock = 5.00% + 1.55 * 7.90%
Cost of Common Stock = 17.245%

Value of Firm = Value of Debt + Value of Preferred Stock + Value of Common Stock
Value of Firm = $170,500,000 + $33,250,000 + $354,900,000
Value of Firm = $558,650,000

Weight of Debt = $170,500,000 / $558,650,000
Weight of Debt = 0.3052

Weight of Preferred Stock = $33,250,000 / $558,650,000
Weight of Preferred Stock = 0.0595

Weight of Common Stock = $354,900,000 / $558,650,000
Weight of Common Stock = 0.6353

WACC = Weight of Debt * After-tax Cost of Debt + Weight of Preferred Stock * Cost of Preferred Stock + Weight of Common Stock * Cost of Common Stock
WACC = 0.3052 * 3.688% + 0.0595 * 4.211% + 0.6353 * 17.245%
WACC = 12.33%