The correct answer to the following question is WACC= 4.55%. Please explain with full details & thank you:
1] | After tax cost of debt = Before tax cost*(1-tax rate) = 3%*(1-30%) = | 2.10% | |||
[Before tax cost of debt = Current yield on bonds, which is | |||||
given as 3%] | |||||
2] | Cost of equity per CAPM = Risk free rate+beta*(Return on market portfolio-Risk free rate) = 2%+0.6*(9%-2%) = | 6.20% | |||
3] | WACC = After tax cost of debt*Weight of debt+Cost of equity*Weight of equity | ||||
The WACC is caculated in the table below: | |||||
Component | Market Value | Weight | Component Cost | WACC | |
Debt [calculated below] | $ 21,56,726 | 40.26% | 2.10% | 0.85% | |
Equity [given] | $ 32,00,000 | 59.74% | 6.20% | 3.70% | |
Total | $ 53,56,726 | 100.00% | 4.55% | ||
WACC = 4.55% | |||||
CALCULATION OF MARKET VALUE OF DEBT: | |||||
Market value of debt is the sume of the following: | |||||
a] The maturity value of $2000000 discounted at 1.5% for | |||||
18 half years. | |||||
b] The PV of the half yearly interest of $40000 for 18 half | |||||
years. Those interest payments constitute an annuity. | |||||
The discount rate is 3%/2 = 1.5%. | |||||
Hence, the market value of debt = 2000000/1.015^18+40000*(1.015^18-1)/(0.015*1.015^18) = | $ 21,56,726 |
The correct answer to the following question is WACC= 4.55%. Please explain with full details &...
**THERE ARE 2 PARTS TO THIS QUESTION, PLEASE ANSWER BOTH** 1. What is the WACC for the firm? A 11.74% B 12.55% C 12.82% D 13.35% E None of the above are within .25% of the correct answer. Marley's Pipe Shops has found that its common equity capital shares have a beta equal to 1.5 while the risk-free return is 8 percent and the expected return on the market is 14 percent. The firm is financed with $120,000,000 of common...
"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...
Question 5 (16 marks) Incarius Ltd has asked you to estimate the WACC for their company. You have collected the following information: The return on risk-free Australian Government Bonds is 2.5% p.a Incarius Ltd has 1,000,000 shares outstanding and its shares are currently trading at $5.50 per share. Beta of Incarius Ltd shares is 1.3, and the expected return on the market is 10.5% Incarius Ltd has 8 million preference shares outstanding at a current price of $11 per share....
Susan's Lemonade, Inc. has a single issue of bonds. The bonds have a face value of $1000, a coupon rate of 5.25% with coupons paid semi-annually, a time to maturity of 2 years, and a current market price of $985.04. The firm is financed with 35% debt and 65% common stock. The firm's common stock has a beta of 1.3. The risk-free rate is 1.56%. The expected return on the market portfolio is 9.6%. The corporate tax rate is 30%....
Question 2 Orange Corp has 1 million shares outstanding, and the stock is currently trading at $10 per share. The company has two different bonds outstanding. First, it has 5000 zero coupon bonds outstanding. Each zero coupon bond has a face value of $1000, will mature in 5 years, and is currently priced at 65% of face value. Second, the company has 5000 coupon paying bonds outstanding. Each coupon paying bond is currently priced at $940.00, and the YTM is...
Question 2 Orange Corp has 1 million shares outstanding, and the stock is currently trading at $10 per share. The company has two different bonds outstanding. First, it has 5000 zero coupon bonds outstanding. Each zero coupon bond has a face value of $1000, will mature in 5 years, and is currently priced at 65% of face value. Second, the company has 5000 coupon paying bonds outstanding. Each coupon paying bond is currently priced at $940.00, and the YTM is...
How do I work out the WACC The company’s preference shares are currently trading at $0.70 each. The company’s ordinary shares are currently trading at $1.55 each. • The risk-free rate of return is 2.36 % p.a., and the return on the market is 8.50 % p.a. • Debentures have a coupon interest rate of 9% p.a. and could be re-issued at the present time at an interest rate of 7% p.a. The debentures will be redeemed at their face...
DQ Industries is analyzing their capital budgeting options and need to make sure their WACC is correct. The current T-Bill rate is 2.5%, market return 10%, and their beta is .9. Their capital structure consists of $6,000,000 in equity and $4,000,000 in 20 year bonds that sold 7 years ago for $1010 but $20 in flotation costs were paid. The coupon rate is 5.4% and payment is semi-annual. Tax rate is 40%. What is their cost of debt? What is...
4. A corporation has 10,000 bonds outstanding with a 4% annual coupon rate, ten years to maturity, a $1,000 face value, and a $1,100 market price. The company’s 100,000 preference shares pay a $2 annual dividend and sell for $20 per share. The company’s 500,000 ordinary shares sell for $35 per share and have a beta of 1.5. The risk-free rate is 3%, and the market return is 8%. Finally, the tax rate is 20%. what is the WACC?
UUSLUTUU Orange Corp has 1 million shares outstanding, and the stock is currently trading at $10 per share. The company has 5000 coupon bonds outstanding. Each coupon bond has a 11% annual coupon, face value of $1000, will mature in 5 years, and is currently priced at 94% of face value. You have decided to calculate the cost of equity using the SML equation. You have estimated that the niska free rate is 5%, and the expected rate of return...