Question

Financial data pertaining to Acosta are as follows:-

Common Shares issues : $1M shares
Share price: $5 per share

Bond issued: 10K bond
Face value of bond: $1K
Price of bond: $1044.52
Coupon rate: 5%
Maturity of bond: 5 years

Information obtains from Wall Street:

Acoste Beta =1.2 times of market beta
10-year Treasury bond yield = 3%
5-year AA bond yield = 3.5%
5-year A bond has spread of 0.5% above AA bond yield
Expected return of the stock market = 9%
Corporate Tax Rate = 20%

i) Calculate the cost of equity, cost of debt, as well as the WACC.

Answer 1

Answer

В Beta 1,2 1 Expected Return 2 0.09 Risk Free Return 3 0.03 Cost of Equity Cost of Equity Risk Free Return+(Expected Return-Risk Free Return)*Beta 4 =C3+(C2-C3)*C1 5 6 7 Face Value 1000 8 Price of Bond 1044.52 9 Coupon Rate 0.05 B7*B9 10 Coupon Amt 11 Term (yrs) 12 Cost of Debt ((Coupon Amt.+(Redemption Amt. - Net Proceeds))/No. of Years)/(redemption amt.+Net proceeds)/2 |=B10+(B7-B8)/B11 (B8+B7)/2 13 14 -B13/B14 15 Cost of Debt 16 Particulars Cost * Weight Book Values - Amount Weight of 17 Debt -1000*10000 Equity B18/B19 =D17*B5 Weight of Debt -B17/B19 D18 B15 18 Equity 5*1000000 -SUM(B17:B18) Total =SUM(D17:D18) =SUM(E17:E18) 19

A C E F Beta 1 1.2 Expected Return 9% 2 Risk Free Return 3% 3 Cost of Equity Risk Free Return+(Expected Return-Risk Free Return)*Beta Cost of Equity = 4 10.20% 5 7 Face Value 1000 8 Price of Bond 1044.52 5% 9 Coupon Rate 10 Coupon Amt 11 Term (yrs) 50 5 ((Coupon Amt.+(Redemption Amt. - Net Proceeds))/No. of Years)/(redemption amt.+Net proceeds)/2 12 Cost of Debt 13 41.096 14 1022.26 15 Cost of Debt 16 Particulars 4.02% Book Values - Amount Particulars Weights Cost Weight Weight of 17 Debt 10000000 Equity 33.33% 3.40% Weight of 18 Equity 5000000 Debt 66.67% 2.68% 15000000 Total 100.00% 6.08% 19 N