WACC 1 The current stock price for a company is $46 per share, and there are 5 m
ID: 2720618 • Letter: W
Question
WACC 1
The current stock price for a company is $46 per share, and there are 5 million shares outstanding. The beta for this firms stock is 1.3, the risk-free rate is 4.7, and the expected market risk premium is 6.4%. This firm also has 290,000 bonds outstanding, which pay interest semiannually. These bonds have a coupon interest rate of 6%, 22 years to maturity, a face value of $1,000, and a current price of 1,023.18. If the corporate tax rate is 33%, what is the Weighted Average Cost of Capital (WACC) for this firm?
The correct answer is 7.88. Show step by step how I arrive at this answer.
Please don't post an answer that is not 7.88 because it is not right! My teacher gave the answer of 7.88 so this is how I know it is the right answer.
Explanation / Answer
Calculation of Cost of Equity:
Cost of equity = Risk free rate of return + Beta × (market rate of return – risk free rate of return)
= 4.7+1.3*(6.4-4.7) =6.91
Cost of Bonds= Interest p.a*(1-Tax)
=6*2*(1-0.33) =8.04
Calculation of WACC:
Item Number Market Rate Market Capital % Cost WACC Equity 5000000 46 230000000 43.67% 6.91 3.01 Bonds 290000 1023.18 296722200 56.33% 8.04 4.53 Total 526722200 100% 7.55Related Questions
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