Question

1) Company XYZ has 8.3 million shares outstanding. The current share price is $53, and the book value per share is $4. XYZ has two bonds outstanding. a) Bond 1 has a face value of $70 million and a 7 percent Coupon rate and sells for 108.3% of par. b) Bond 2 has a face value of $60 million and 7.5% coupon rate and sells for 108.9% of par. Bond 1 matures in 8 years, Bond 2 matures in 27 years. All coupon payments are semi-annual. (0) Find the company's capital structure weights on a market value basis. Find the Capital structure weights on a book value basis. (Book value of the debt = Face Value and the market value of the debt price quote times the face value) (ii) Suppose the company has a beta of 1.2, the risk free rate is 3.1percent, and the market risk premium is 7%. What is the WACC? Assume that the tax rate is 35%.

Answer 1

i)

Market Value of Equity = 8.3 million* $53 = $439.9 million

Market Value of Debt = ($70 million*1.083) + ($60 million*1.089) = $75.81 million + $65.34 million = $141.15 million

	Market Value(in million)	Weights
Equity	439.9	75.71%
Debt	141.15	24.29%
	581.05

Book Value of Equity = 8.3 million* $4= $33.2 million

Book Value of Debt = $70 million + $60 million= $130 million

	Book Value(in million)	Weights
Equity	33.2	20.34%
Debt	130	79.66%
	163.2

ii)

COST OF DEBT

We will find the YTM of bond with BA 2 Plus Financial Calculator:

Bond 1-

PV: $75.81 million

FV: $70 million

N: 16

PMT: $2.45 million

CMPT I/Y

I/Y = 2.8469%

YTM = I/Y*2 = 5.6939%

After tax cost = 5.6939%*(1-0.35) = 3.701%

Bond 2-

PV: $65.34 million

FV: $60 million

N: 54

PMT: $2.25 million

CMPT I/Y

I/Y = 3.3887%

YTM = I/Y*2 = 6.7773%

After tax cost = 6.7773%*(1-0.35) = 4.405%

COST OF EQUITY

Ke = 3.1% + (1.2*7%) = 11.5%

WACC:

	Market Value	Weights	Cost	Weights*Cost
Equity	439.9	0.757	11.50%	8.71%
Bond 1	75.81	0.130	3.701%	0.48%
Bond 2	65.34	0.112	4.405%	0.50%
	581.05	1	WACC	9.68%