Problem Solving WACC 31-35 Equity Information i. 50 million shares ii. $80 per s
ID: 2619965 • Letter: P
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Problem Solving WACC 31-35 Equity Information i. 50 million shares ii. $80 per share ii. Beta 1.11 iv. Market risk premium-7% V. Risk-free rate 2% Debt Information vi. $1 billion in outstanding debt (face value) vii. Current quote 108 viii. Coupon rate: 9%, semiannual coupons ix. 15 years to maturity x. Tax rate:35% 31. what is the cost of equity? a. 0.79% b. 1.79% c. 2.79% d. 3.79% e. 4.79% 1.597% g. 6.69% h. 9.77% i. 10.12% j. 11.06% e. 479% 32. what is the before tax cost of debt? a. 0.79% b. 1.79% c. 2.79% d. 379% 5.97% g. 8.07% h. 9.54% i. 10.12% j. 11.06% f. 33, what is the after tax cost of debt? a. 0.79% b. 1.79% c. 2.79% d. 3.79% e. 4.79% 5.25% g. 8.07% h. 9.54% i. 10.12%). 11.06% 34. What are the capital structure weights? Ena 60% b 72.34% c. 78.74% d 83.44% e, 90% 35, what is the WACC?? a. 0.79% b. 1.79% , 2.79% d. 3.79% e. 4 .79% f. 597% g f. 95% 8.81% h. 9.54% i. 10.12%). 11.06%Explanation / Answer
31) Calculation of Cost of Equity (Ke)
Ke = Risk free rate (Rf) + (Market return – risk free rate) * beta
Riskfree rate
2.00%
Beta
1.11
Market return
9%
Ke = 2% + 7%*1.11 = 9.77%
32) Before tax cost of Debt
Yield to maturity (YTM) = [{Coupon + (F-P)/n} / (F+P)/2 ]
F= redeemable price
P= current price
n= no. of times
Coupon = (9%/ 2) = 4.5% semi- annually
YTM = [{4.5 + (100-108)/ 30} / (108+100)/2 ]
= (4.5 - 0.26667)/ 104
= 4.07 % (for 6 months)
Bond Equivalent Yield (BEY) = 4.07*2 = 8.14%
Therefore before tax cost of debt = 8.14%
33) After tax cost of Debt
Yield to maturity (YTM) = [{Coupon + (F-P)/n} / (F+P)/2 ]
F= redeemable price
P= current price
n= no. of times
tax rate = 35%
Coupon = (9%/ 2) = 4.5% semi- annually
YTM = [{4.5 (0.65) + (100-108)/ 30} / (108+100)/2 ]
= (2.925 - 0.26667)/ 104
= 2.556% (for 6 months)
Bond Equivalent Yield (BEY) = 2.556*2 = 5.11%
Therefore after tax cost of debt = 5.11%
34) Capital structure weight (E/V)
Amount of Equity
Shares
5,00,00,000
Price
80
Value
4,000,000,000
Amount of Debt = 1,080,000,000
Amount
Weight
Debt
1,080
0.2126
Equity
4000
0.7874
Total
5,080
1
Therefore (E/V) = 78.74%
35) WACC
WACC = wD*rD *(1-t) + wE*rE
w = the respective weight of debt, preferred stock/equity, and equity in the total capital structure
Amount
Weight (a)
Cost (b)
Product (a*b)
Debt
1,080
0.2126
5.11%
0.01086378
Equity
4000
0.7874
9.77%
0.076929134
Total
5,080
1
0.087792913
WACC= 8.77%
Riskfree rate
2.00%
Beta
1.11
Market return
9%
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