Question

You have just been hired as a financial analyst, and have been assigned the task of calculating the WACC for your new company.

Debt: 5 thousand bonds will be issued. Each bond has 15 years to maturity, a 7.5% coupon rate, and is priced at 103% of par (par value = $1,000). The bond pays semiannual coupon payments.

The return on the S&P index is currently 11.2% and the return on T-bills is 4.3%. The equity beta of your company's stock is 1.24. There are 111 thousand shares of common stock outstanding, and the stocks's current price is $30.95.

The company's preferred stock pays a dividend of $2.15 and is currently priced at $23.57. There are 13 thousand shares of preferred stock outstanding.

The company's tax rate is 38%.

Given the data listed below, calculate the WACC and enter your answer as a decimal with a leading zero and four places of precision (i.e. 0.1234).

Round all intermediate costs (r's) and weights (w's) to 6 decimal places.

Answer 1

Before tax cost of debt: 7.17% RATE(15*2,1000*7.5%/2,-1030, 1000)*2 after tax cost of debt: 4.45% before tax cost x 1-tax rate (7.17%*(1-0.38)) Cost of equity: = risk free rate + beta x market premium 12.86% 0.043+(1.24*(0.112-0.043)) Cost of preferred stock: annual dividend/current market price 9.12% 2.15/23.57 After tax WACC: Market value Particulars amount weight cost weighted cost Debt $5,150,000 0.5792 4.45% 0.02575 Preferred stock $306,410 0.0345 9.12% 0.00314 Equity $3,435,450 0.3864 12.86% 0.04967 Total market value $8,891,860 0.0786 WACC