WACC The current stock price for a company is $38 per share, and there are 5 mil

Question

WACC The current stock price for a company is $38 per share, and there are 5 million shares outstanding. The beta for this firms stock is 1.1, the risk-free rate is 4.7, and the expected market risk premium is 6.4%. This firm also has 210,000 bonds outstanding, which pay interest semiannually. These bonds have a coupon interest rate of 8%, 18 years to maturity, a face value of $1000, and an annual yield to maturity of 8.1%. If corporate tax rate is 35%, What is the weighted average cost of capital(WACC) for this firm?

Explanation / Answer

As per CAPM Model

Cost of Equity = Ke = Risk free return + Beta*(Market Return – Risk free return)

Ke = 4.7% + 1.1* Market risk premium = 4.7% + 1.1*6.4% = 11.74%

Total equity capital = Stock Price * stock capital = 38*5000000 = 190 Million

Cost of debt = Kd = Yield to Maturity = 8.1%

Total debt Capital = 1000* no. of bonds = 1000*210000 = 210 Million

Tax rate = T = 35%

Now

WACC = Ke*(Equity/(Equity + Debt)) + (Kd*(1-T))* (Debt/(Equity + Debt))

WACC = 11.74%*(190/(190+210)) + (8.1%*(1-35%))* (210/(190 + 210))

WACC = 8.34%

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