Question

Problem – WACC

Given the following information:

Miramar Power has a tax rate of 35 percent and:

debt: 10,000, 5 percent bonds outstanding, $1,000 par value currently selling at 100 percent of par.

YTM = 4.8%

common stock: 200,000 shares outstanding selling for $50 per share, the beta is 1.3

market: 7 percent market premium, and a 3 percent risk-free rate.

Calculate the WACC: SHOW ALL WORK TO RECEIVE CREDIT

Answer 1

As Per CAPM,

Required Return = Risk Free Rate +( Market Risk Premium ) * Beta

= 3% +( 7%) * 1.3

= 12.10%

After Tax Cost of Debt = YTM * ( 1- Tax Rate)

= 4.8% * ( 1- 35%)

= 3.12%

Weight of Equity = 0.50

Weight of Debt = 0.50

WACC = Cost of Debt * Weight of Debt + Cost of Equity * Weight of Equity

= 3.12% * 0.5 + 12.10% * 0.5

= 1.56 % + 6.05%

= 7.61%

Hence the correct answer is 7.61%

Note :

	Number	Per	Value ( Number * Per )	Weight (Value / Total Value)
Debt	10,000	1,000	1,00,00,000	0.5
Equity	200000	50	1,00,00,000	0.5
			2,00,00,000