Question

Question # 20 - Raymond Mining Corporation has 8.7 million shares of common stock outstanding, 310,000 shares of 6% $100 par value preferred stock outstanding, and 147,000 7.50% semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $35 per share and has a beta of 1.35, the preferred stock currently sells for $91 per share, and the bonds have 20 years to maturity and sell for 116% of par. The market risk premium is 7.5%, T-bills are yielding 5%, and Raymond Mining’s tax is 30%. The YTM before taxes is 6.104%.

What is the WACC? (Enter your answers in whole dollars. Omit % sign in your response.)

Answer 1

Calculation fo Market Value of the company

Market Value = MV of Common Shares + MV of Preferrence Shares + MV of bonds

= 8,700,000 *$35+ 310,000*$91 + $147,000*$1,000 * $116%

= $304,500,000 + $28,210,000 +$170,520,000

Market Value = $503,230,000

Weight of Common Stock = (Market Value of Common Stock / Total Market Value )* 100

= ($304,500,000 / $503,230,000)

Weight of Common Stock = 60.509%

Weight of Preferred Stock = (Market Value of Preferred Stock / Total Market Value )* 100

= ($28,210,000 / $503,230,000)

Weight of Preferred Stock = 5.605%

Weight of Bond = (Market Value of Bond / Total Market Value )* 100

= ($170,520,000 / $503,230,000)

Weight of Bond = 33.885%

Cost of Common stock = Risk free rate +Market Premium * Beta

= 5% + 7.5% * 1.35%

Cost of Common stock = 15.125%

Cost of Preferred stock = (Dividend / Price ) * 100

= 100*6% / 91

Cost of Preferred stock = 6.593%

Cost of Debt = YTM(100%- Tax rate)

= 6.104% ( 100 - 30%)

= 6.104% (70%)

Cost of Debt = 4.272%

WACC = (Weight of Common stock * Cost of Common Stock) + (Weight of Preferred stock * Cost of Preferred Stock) + (Weight of debt * Cost of Debt)

= (60.509% * 15.125%) + (5.605%*6.593%)+(33.885%*4.272%)

WACC = 10.96%