You have the following information on Davidsons Corp. (1) The firm\'s bonds have

Question

You have the following information on Davidsons Corp. (1) The firm's bonds have a maturity of 20 years, a 8.00% annual coupon, a par value of $1,000, and a market price of $1,075.00. (2) The company’s average tax rate is 40%. (3) The stock's beta is 1.20, the risk-free rate is 4.50%, and the market risk premium is 5.50%. (4) The company has a capital structure that consists of 35% debt and 45% common equity. What is the company's WACC?

8.74%

9.53%

9.18%

7.52%

8.13%

1.

8.74%

2.

9.53%

3.

9.18%

4.

7.52%

5.

8.13%

Explanation / Answer

Expected return = Rf+×Rp

Rf is risk free return

Rp is risk premium

= 4.5%+1.20×5.50%

= 11.1%

WACC:

= 11.1%×0.65+4.37%×0.35

= 8.74%

Face value (FV) $                                  1,000.00 Coupon rate 8.00% Number of compounding periods per year 2 Interest per period (PMT)                                            40.00 Bond price (PV) $                               (1,075.00) Number of years to maturity 20 Number of compounding periods till maturity (N) 40 Bond Yield to maturity RATE(NPER,PMT,PV,FV)*2 Bond Yield to maturity 7.28% (Pre-tax cost of debt) Bond Yield to maturity 4.37% (After-tax cost of debt) 7.28%*(1-40%)

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