Question

s tax rate is 35 percent 9.000 8 percent coupon bonds outstanding. $1,000 par value, 25 years to maturity, selling for 102 5 percent af par, the bonds make semiannual paymonts Debt Common stock 215,000 Prefened stock 12,500 shares of 5, 75 percent preferred stock outstanding, currently selling for $97 50 per share Market shares outstanding, selling for $83 50 per share, beta is 1.20 7 percent market risk premium and 4 8 percent nsk-free rate Calculate the company's WACC. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, eg. 32.16)

Answer 1

Debt:

Number of bonds outstanding = 9,000
Face Value = $1,000
Current Price = 102.5%*$1,000 = $1,025

Value of Debt = 9,000 * $1,025
Value of Debt = $9,225,000

Annual Coupon Rate = 8%
Semiannual Coupon Rate = 4.00%
Semiannual Coupon = 4.00%*$1,000 = $40

Time to Maturity = 25 years
Semiannual Period to Maturity = 50

Let semiannual YTM be i%

$1,025 = $40 * PVIFA(i%, 50) + $1,000 * PVIF(i%, 50)

Using financial calculator:
N = 50
PV = -1025
PMT = 40
FV = 1000

I = 3.886%

Semiannual YTM = 3.886%
Annual YTM = 2 * 3.886%
Annual YTM = 7.772%

Before-tax Cost of Debt = 7.772%
After-tax Cost of Debt = 7.772% * (1 - 0.35)
After-tax Cost of Debt = 5.05%

Preferred Stock:

Number of shares outstanding = 12,500
Current Price = $97.50
Annual Dividend = 5.75%*$100 = $5.75

Value of Preferred Stock = 12,500 * $97.50
Value of Preferred Stock = $1,218,750

Cost of Preferred Stock = Annual Dividend / Current Price
Cost of Preferred Stock = $5.75 / $97.50
Cost of Preferred Stock = 5.90%

Equity:

Number of shares outstanding = 215,000
Current Price = $83.50

Value of Common Stock = 215,000 * $83.50
Value of Common Stock = $17,952,500

Cost of Common Equity = Risk-free Rate + Beta * Market Risk Premium
Cost of Common Equity = 4.8% + 1.20 * 7%
Cost of Common Equity = 13.20%

Value of Firm = Value of Debt + Value of Preferred Stock + Value of Common Stock
Value of Firm = $9,225,000 + $1,218,750 + $17,952,500
Value of Firm = $28,396,250

Weight of Debt = $9,225,000/$28,396,250
Weight of Debt = 0.3249

Weight of Preferred Stock = $1,218,750/$28,396,250
Weight of Preferred Stock = 0.0429

Weight of Common Stock = $17,952,500/$28,396,250
Weight of Common Stock = 0.6322

WACC = Weight of Debt*After-tax Cost of Debt + Weight of Preferred Stock*Cost of Preferred Stock + Weight of Common Stock*Cost of Common Stock
WACC = 0.3249*5.05% + 0.0429*5.90% + 0.6322*13.20%
WACC = 10.24%