MV of equity=Price of equity*number of shares outstanding |
MV of equity=84*4100000 |
=344400000 |
MV of Bond1=Par value*bonds outstanding*%age of par |
MV of Bond1=1000*70000*0.98 |
=68600000 |
MV of Bond2=Par value*bonds outstanding*%age of par |
MV of Bond2=1000*50000*1.08 |
=54000000 |
MV of firm = MV of Equity + MV of Bond1+ MV of Bond 2 |
=344400000+68600000+54000000 |
=467000000 |
Weight of equity = MV of Equity/MV of firm |
Weight of equity = 344400000/467000000 |
W(E)=0.7375 |
Weight of debt = MV of Bond/MV of firm |
Weight of debt = 122600000/467000000 |
W(D)=0.2625 |
Cost of equity |
As per DDM |
Price = recent dividend* (1 + growth rate )/(cost of equity - growth rate) |
84 = 3.95 * (1+0.05) / (Cost of equity - 0.05) |
Cost of equity% = 9.94 |
Cost of debt |
Bond1 |
K = Nx2 |
Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k] + Par value/(1 + YTM/2)^Nx2 |
k=1 |
K =20x2 |
980 =∑ [(5.1*1000/200)/(1 + YTM/200)^k] + 1000/(1 + YTM/200)^20x2 |
k=1 |
YTM1 = 5.2628923903 |
Bond2 |
K = Nx2 |
Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k] + Par value/(1 + YTM/2)^Nx2 |
k=1 |
K =12x2 |
1080 =∑ [(5.6*1000/200)/(1 + YTM/200)^k] + 1000/(1 + YTM/200)^12x2 |
k=1 |
YTM2 = 4.72 |
Firm cost of debt=YTM1*(MV bond1)/(MV bond1+MV bond2)+YTM2*(MV bond2)/(MV bond1+MV bond2) |
Firm cost of debt=5.2628923903*(68600000)/(68600000+54000000)+4.72*(68600000)/(68600000+54000000) |
Firm cost of debt=5.02% |
After tax cost of debt = cost of debt*(1-tax rate) |
After tax cost of debt = 5.02*(1-0.21) |
= 3.9658 |
WACC=after tax cost of debt*W(D)+cost of equity*W(E) |
WACC=3.97*0.2625+9.94*0.7375 |
WACC =8.37% |
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