Company has 3,000,000 shares with a current market price of $100 per share. It h

Question

Company has 3,000,000 shares with a current market price of $100 per share. It has $1,200,000 in paid-in capital and 800,000 in retained earnings. It also has issued 50,000 bonds with a face value of $900 each, and a current market price of $1000. Wolf has an equity beta of 1.2. It has a debt rating of AA, and for that rating investors require a return of 5%. The expected return on the market portfolio is 10%, the risk-free rate is 4% and the corporate income tax rate is 20%.

What is the weighted average cost of capital for the company? Answer: 10.17%

I got the answer with my workings but not sure if my workings are correct. Please provide me with an explanation how ratings affect the workings (if it does).

Explanation / Answer

Mv of shares 3000000*100 300,000,000 cost of equity 4%+1.2*(10%-4%) 11.20% MV of bond =50000*1000 50,000,000 cost of debt= 5% after tax cost of debt =5%*0.8 4.00% MV weight Debt WACC stock 300,000,000 0.85714 11.20% 9.60% debt 50,000,000 0.14285 4% 0.57% 350,000,000 1 10.17%

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