You have been asked to calculate the WACC of a company that you firm is trying t

Question

You have been asked to calculate the WACC of a company that you firm is trying to value. The firm has the following element of capital:

1. Short Term Debt

Market Value = $30 million; Return = 4.50%

2. Long Term Debt

Par (Face Value) = $450 million; Coupon rate = 6.00%; Maturity 10 years: Current yield to maturity is 6.20%

3. Common Equity

a. Class A shares (publically Traded)

30 million share outstanding; beta = 1.20; Latest Price = $22.40

b. Class B Shares (Not publically Traded)

10 million Share Outstanding; Estimated Beta = 1.40; Last Dividend Paid: $2.00 per share; Expected growth rate in dividends = 5%

4. Preferred Stock

2 million shares outstanding; Market Price = 100; Dividend Share = $5.00

Note: Do not use Floatation Cost i.e. Flotation cost = 0; Risk free rate = 2.00% and expected return on the market is 6.00%.

The firm’s tax rate is 40%

Explanation / Answer

All Amounts in $ million WACC Calculation (based on Market Value) Particulars of Capital Valuation Rate of Post Tax Weighted Return Rate Value Short Term Debt 30 4.50% 2.700% 0.81 Long Term Debt * 443.4 6% 3.600% 15.96 Equity - Class 1 ** 672 5.60% 5.60% 37.63 Equity - Class 2 *** 375 5.60% 5.60% 21 Preferred Stock **** 200 5% 5% 10 Total 1720 85.41 Thus, the Weighted Average Cost of Capital or WACC will be 4.96% * Market Value of Long Term Debt will be $ 443.438 or $ 443.44 million ** Rate of Return on Equity Shares - Class I will be (6% - 2%) X 1.4 = 5.6% *** Price per share for Equity - Class 2 currently in use will be ($2 X 105%) / ((6% - 2%) X 1.4) 37.5 $ per share **** Rate of Return on Preferred Stock = $ 5 / $ 100 = 5%

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.