Given the following, find the WACC assuming the tax rate is 30%. Debt: 8500 bond

ID: 2709259 • Letter: G

Question

Given the following, find the WACC assuming the tax rate is 30%.

Debt: 8500 bonds outstanding with 7.2% coupon, $1000 par value, 25 years to maturity,current market yield is 5.82%, coupons made semi-annually.

Ordinary shares: 225,000 shares outstanding selling for $87 per share with beta of 1.15.

Preference shares: paying dividends of 8% of a $100 par value, 15,000 outstanding, currently selling for $98 per share.

Other information: Market risk premium = 7%, risk-free rate = 3.1%

(a) What is the total market value of the bonds?

(b) What is the total market value of preference shares?

(d) What is the required rate of return on preference shares?

(e) What is the required rate of return on ordinary shares?

Please show all working out.

Answer: We will begin by finding the market value of each type of financing. We find:

And the after-tax cost of debt is: •

Kd= (1 – 0.30)(0.0582) = 0.0408, or 4.08% •

The cost of preference shares is:

Kp= $8.00/$98 =0.0816 or 8.16%

Now, we can find the cost of equity using the CAPM.

The cost of equity is:

Ke = 0.031 + 1.15(0.07) = 0.1115, or 11.15%

WACC=0.0408*(10030000/31075000)+0.1115 (19575000/31075000)+0.0816(1470000/31075000)

=0.0131689+0.0702369+0.00386

=8.72658%

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