Question

"What is the WACC for the following company? Debt: 15,000 bonds with a par value of $1,000 and a quoted price of 113.25. The bonds have coupon rate of 4.7 percent and 15 years to maturity. 20,000 zero coupon bonds with a par value of $10,000, a quoted price of 30.45, and 28 years to maturity. Common Stock: 1,550,000 shares of stock selling at a market price of $105. The beta for the stock is 1.25. The company just paid an annual dividend of $0.85 and the dividend growth rate is 4.8 percent. Market: The expected return on the market is 10.7 percent and the risk-free rate is 3.6 percent. The tax rate is 22 percent."

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Answer 1

D45 X fi =C45/$C$50 B C D E WACC (Cost %xWeights) 6.13% Cost % 44 45 Common stock Weights 0.6763 9.06% Market value 162,750,000 =1550000*105 $ 46 47 3.26% $ 77.887,500 0.3237 1.06% 48 Debt (After tax cost) 49 Total $ 240,637,500 1.0000 Weighted average cost of capital (WACC)| 7.19% After tax cost % 2.77% =RATE(15,47,-1132.5,1000,0)*(1-22%) Market value 16,987,500 =15000*1000*113.25% Weights 0.2181 WACC (Cost %xWeights) 0.60% 55 Debt 1 56 57 58 Debt 2 0.7819 2.66% 3.40% $ 60,900,000 =RATE(28,0,-3025,10000,0)*(1-22%) 1 =20000*10000*30.45% 59 60 $ 77,887,500.00 1.0000 After tax cost of debt 3.26% 61 Total 62 63 64 65 Common stock (under DCF Method) 66 Common stock (under SML Method) 67 68 Average cost of equity 5.65% =0.85*(1+4.8%/105+4.8% 12.48% =3.6%+1.25*(10.7%-3.6%) 9.06%

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