QUESTION 41 The current stock price for a company is $44 per share, and there ar
ID: 2478700 • Letter: Q
Question
QUESTION 41
The current stock price for a company is $44 per share, and there are 8 million shares outstanding. The beta for this firms stock is 1.2, the risk-free rate is 4.8, and the expected market risk premium is 6.1%. This firm also has 100,000 bonds outstanding, which pay interest semiannually. These bonds have a coupon interest rate of 8%, 27 years to maturity, a face value of $1,000, and an annual yield to maturity of 7.8%. If the corporate tax rate is 37%, what is the Weighted Average Cost of Capital (WACC) for this firm? (Answer to the nearest hundredth of a percent, but do not use a percent sign).
Explanation / Answer
Weighted average cost of capital = 0.1052 or 10.52
Workings:
Market value of debt = 100,000 x ( $ 40 x 22.3924 + 1,000 x 0.1267) = $ 102,239,600
Specific cost of equity ( CAPM Model) = 4.8 + 1.2 x 6.1 = 12.12%
Specific cost of debt = Coupon rate x (1-t) = 0.08 x (1-0.37) =
Source of capital Market value Market value weights Specific cost of capital Weighted cost of capital Equity $ 352,000,000 0.7749 0.1212 0.0939 Debt $ 102,239,600 0.2251 0.0504 0.0113 $ 454,239,600 1.0000 0.1052Related Questions
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