McCann Catching, Inc. has 2.00 million shares of stock outstanding. The stock currently sells for $12.62 per share. The firm’s debt is publicly traded and was recently quoted at 90.00% of face value. It has a total face value of $10.00 million, and it is currently priced to yield 10.00%. The risk free rate is 4.00% and the market risk premium is 8.00%. You’ve estimated that the firm has a beta of 1.17. The corporate tax rate is 38.00%. The firm is considering a $43.70 million expansion of their production facility. The project has the same risk as the firm overall and will earn $12.00 million per year for 7.00 years. What is the WACC for McCann Catching, Inc.?
Shares outstanding = 2,000,000
Share price = $12.62
Market value of equity = Number of shares*Share price = 2,000,000*12.62
Market value of equity = $25240000
The required rate of return R(e) is calculated by CAPM model
R(e) = r(f) + Beta*(R(m) - r(f))
R(m) is the market return =8%
r(f) is the risk-free rate = 4%
R(e) = 0.04+1.17*(0.08-0.04)
R(e) = 0.0868 = 8.68%
Market value of debt = Face value*Price
Market value of debt = 10,000,000*0.90 = 9,000,000
Total value = Equity + Debt = 9,000,000+25240000 = 34240000
Weight of debt = 9000000/34240000 = 0.2629
Weight of equity= 25240000/34240000 = 0.7371
WACC=after tax cost of
debt*W(D)+cost of equity*W(E)
WACC=0.2629*0.11*(1-0.38)+0.7371*0.0868 = 0.01792978+0.06398028
WACC = 0.0819 =
8.19%
McCann Catching, Inc. has 2.00 million shares of stock outstanding. The stock currently sells for $12.62...
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