Homework Answers
| MV of equity=Price of equity*number of shares outstanding |
| MV of equity=54*1000000 |
| =54000000 |
| MV of Bond=Par value*bonds outstanding*%age of par |
| MV of Bond=1000*100000*1.15 |
| =115000000 |
| MV of firm = MV of Equity + MV of Bond |
| =54000000+115000000 |
| =169000000 |
| Weight of equity = MV of Equity/MV of firm |
| Weight of equity = 54000000/169000000 |
| W(E)=0.3195 |
| Weight of debt = MV of Bond/MV of firm |
| Weight of debt = 115000000/169000000 |
| W(D)=0.6805 |
| Cost of equity |
| As per CAPM |
| Cost of equity = risk-free rate + beta * (expected return on the market - risk-free rate) |
| Cost of equity% = 3.5 + 1.15 * (9 - 3.5) |
| Cost of equity% = 9.83 |
| Cost of debt |
| K = Nx2 |
| Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k] + Par value/(1 + YTM/2)^Nx2 |
| k=1 |
| K =15x2 |
| 1150 =∑ [(8*1000/200)/(1 + YTM/200)^k] + 1000/(1 + YTM/200)^15x2 |
| k=1 |
| YTM = 6.4268920164 |
| After tax cost of debt = cost of debt*(1-tax rate) |
| After tax cost of debt = 6.4268920164*(1-0.4) |
| = 3.85613520984 |
| WACC=after tax cost of debt*W(D)+cost of equity*W(E) |
| WACC=3.86*0.6805+9.83*0.3195 |
| WACC =5.77% |
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