Given the following information for find the WACC. Assume the company\'s tax rat

Question

Given the following information for find the WACC.  Assume the company's tax rate is 35%

Debt:    8000 6.5 per cent coupon bonds outstanding, $1000 par value, 25 years to maturity, selling for 106 percent of par; the bonds make semi-annual payments.

Common Stock:   310000 shares outstanding, selling for $57 per share; the beta is 1.05

Preferred Stock:  15000 shares of 4 percent preferred stock outstanding, currentlt selling at $72 per share.

Market:   7 percent market risk premium and 4.5 percent risk free rate.

Explanation / Answer

Cost of debt = rd

Coupon payment = 6.5%*1000/2 =$32.5

106%*1000 = 32.5/(1+rd) +  32.5/(1+rd)^2 +  32.5/(1+rd)^3.... 1032.5/(1+rd)^50

rd= 6.03%

Debt = 8000*106%*1000 =$8,480,000

Cost of equity = 4.5% + 1.05*7% = 11.85%

Equity = 310000*57 =$17,670,000

Preferred stock

72 = 4%*100/rp

rp= 5.56%

Preferred Stock = 15000*72 =$1,080,000

WACC = Equity%*re + Debt%*rd*(1-tax)+ Preferred%*rp

= (17,670,000*11.85% + 8,480,000*6.03%*(1-35%) + 1,080,000*5.56%)/(1,080,000+17,670,000+ 8,480,000)

= 9.13%

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