Vedder, Inc., has 6.3 million shares of common stock outstanding. The current sh

Question

Vedder, Inc., has 6.3 million shares of common stock outstanding. The current share price is $61.30, and the book value per share is $4.30. Vedder also has two bond issues outstanding. The first bond issue has a face value of $70.3 million, a coupon rate of 7.3 percent, and sells for 96.5 percent of par. The second issue has a face value of $35.3 million, a coupon rate of 6.8 percent, and sells for 95.5 percent of par. The first issue matures in 19 years, the second in 11 years. The most recent dividend was $3.00 and the dividend growth rate is 9 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 38 percent. What is the company's WACC ?

Explanation / Answer

61.30 = 3*1.09/r-0.09

cost of equity r = 14.33%

67.8395 = 2.56595 * PVIFA(r%,38) + 70.3 * PVIF(r%,38)

r = 3.83%

after tax cost of debt1 = 2 * 3.83% * (1-0.38) = 4.7492%

33.7115 = 1.2002 * PVIFA(r%,22) + 35.3 * PVIF(r%,22)

r = 3.70%

after tax cost of debt2 = 2 * 3.70% * (1-0.38) = 4.588%

market value of equity = 6.3 * 61.3= 386.19

market value of debt 1 = 67.8395

market value of debt2 = 33.7115

total value = 487.741

WACC = (386.19/487.741) * 14.33 + (67.8395/487.741) * 4.7492 + (33.7115/487.741) * 4.588

= 12.32%

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