Pain Corp. has 350,000 shares of common stock outstanding. Last month, Pain Corp

Question

Pain Corp. has 350,000 shares of common stock outstanding. Last month, Pain Corp paid an annual dividend in the amount of $8.50 per share. The dividend is expected to grow g=3% every year forever. Pain Corp also has 19,500 bonds outstanding with a face value of $10,000 per bond. The bonds carry a 9% coupon, pay interest quarterly, and mature in 30 years. The bonds are selling at a 10% discount. The company's tax rate is 30%. The T-Bills rate is 4%, the market risk premium is 7%, and the company’s beta is 1.85. What is Pain Corp's weighted average cost of capital?

Explanation / Answer

NOTE: COST OF EQUITY CAN BE CALCULAED WITHOUT USING STOCK PRICE WITH THE HELP OF CAPM MODEL, ALTHOUGH STOCK PRICE -=> 8.50/3% => $283.33

cost of debt = > [interest/ amount of debt - discount] * (1-taxrate)

=> [17550000 / ( 195000000- 1950000) ] * (1-30%)

=> (17550000/175500000) (1-30%)

=> 0.07 *100 => 7%

cost of equity => 4% + (7% * 1.85)

=> 16.95%

weight of debt and equity => debt 19500, equty => 350000

debt => 19500/ (19500+ 35000) => 0.05

equity => 350000 / ( 19500 + 350000) => 0.95

WACC => [(0.07*0.05) + ( 0.1695 * 0.95)] *100

WACC => 16.46%

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