Given the following information for Jalen Inc. Assume the firm has a tax rate of

ID: 2617005 • Letter: G

Question

Given the following information for Jalen Inc. Assume the firm has a tax rate of 30%. Debt: 250,000 bonds outstanding with 4.5% coupon rate. Par value of $1,000 per bond, 15 years to maturity, selling for 105% of par; the bonds make semi-annual payments. Common stock: 8,500,000 shares outstanding, trading for $55.75 per share. The beta is 1.33. Market: 12% expected return on the market and 3.5% risk free rate. Calculate the weighted average cost of capital (WACC). (Enter percentages as decimals and round to 4 decimals)

Explanation / Answer

Particulars

Market price

Quantity

Market value

Weights

Equity

55.75

8,500,000

473,875,000

64.3524%

Debt

1050.00

250,000

262,500,000

35.6476%

Total

736,375,000

100.00%

Cost of equity can be determined from CAPM equation:

Cost of equity = Risk free rate + Beta x (Market return – Risk free rate)

Cost of equity = 3.5% + 1.33 x (12% - 3.5%)

Cost of equity = 14.8050%

Now, we can calculate the cost of debt:

Using financial calculator BA II Plus - Input details:

FV = Future Value =

$1,000

PV = Present Value =

-$1,050

N = Total number of remaining payment periods =

PMT = Payment =

$22.5

CPT > I/Y = Rate =

2.025953

Convert Yield in annual and percentage form = Yield x 2 x 100

4.051906%

Cost of debt = 4.051906%

Finally, we can calculate now WACC:

WACC = Cost of equity x Weight of equity + Cost of debt x Weight of debt x (1-Tax)

WACC = 14.8050% x 64.3524% + 4.051906% x 35.6476% x (1-30%)

WACC = 10.5385%