Question

*** Only need help with Calculating the WACC in the 2nd problem. Problem 11 is the first question*** Thank you

Book Value versus Market Value Masterson, Inc., has 4.1 million shares of common stock outstanding. The current share price is $84, and the book value per share is $11. The company also has two bond issues outstanding. The first bond issue has a face value of $ 70 million, has a coupon rate of 5.1 percent, Page 418 and sells for 98 percent of par. The second issue has a face value of $50 million, has a coupon rate of 5.60 percent, and sells for 108 percent of par. The first issue matures in 20 years, the second in 12 years. a. What are the company's capital structure weights on a book value basis? b. What are the company's capital structure weights on a market value basis? c. Which are more relevant, the book or market value weights? Why? Calculating the WACC In Problem 11, suppose the most recent dividend was $3.95 and the dividend growth rate is 5 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 21 percent. What is the company's WACC?

Answer 1

Cost % 9.94% =3.95*(1+5%)/84+5% Market value $ 344,400,000 =4100000*84 Weights 0.7375 Common stock WACC (Cost %xWeights) 7.33% Debt (After tax cost) 3.97% $ 122,600,000 0.2625 1.04% Total $ 467,000,000 1.0000 Weighted average cost of capital (WACC) 8.37% After tax cost % 4.16% =RATE(20*2,51/2,-980,1000,0)*2*(1-21% Market value $ 68,600,000 = 70000000*98% Weights 0.5595 Debt 1 WACC (Cost %xWeights) 2.33% Debt 2 0.4405 1.64% 3.73% =RATE(12*2,56/2,-1080,1000,0)*2*(1-21% $ 54,000,000 =50000000*108% Total $ 122,600,000.00 1.0000 After tax cost of debt 3.97%

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