pioneer Inc. has the following financing outstanding: Debt: 50,000 bonds with a
ID: 2695945 • Letter: P
Question
pioneer Inc. has the following financing outstanding:
Debt: 50,000 bonds with a 7 percent coupon rate and a current price quote of 119.80; the bonds have 25 years to maturity. And 250,000 zero coupon bonds with a price quote of 31.75 and 20 years to maturity.
Common Stock: 1,750,000 shares of common stock: the current price is $71, and the beta of the stock is 1.23.
Market: The corporate tax rate is 35 percent, the market risk premium is 6 percent, and the risk-free rate is 3 percent.
What is the WACC of pioneer Inc.?
Explanation / Answer
1. The WACC (discount rate) calculation for Pioneer Natural Resources uses comparable companies to produce a single WACC (discount rate). An industry average WACC (discount rate) is the most accurate for Pioneer Natural Resources over the long term. If there are any short-term differences between the industry WACC and Pioneer Natural Resources's WACC (discount rate), then Pioneer Natural Resources is more likely to revert to the industry WACC (discount rate) over the long term.
2. The WACC calculation uses the higher of Pioneer Natural Resources's WACC or the risk free rate, because no investment can have a cost of capital that is better than risk free. This situation may occur if the beta is negative and Pioneer Natural Resources uses a significant proportion of equity capital.
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