The Saunders Investment Bank has the following financing outstanding. Debt: 60,0

Question

The Saunders Investment Bank has the following financing outstanding. Debt: 60,000 bonds with a coupon rate of 9 percent and a current price quote of 109.5; the bonds have 20 years to maturity. 230,000 zero coupon bonds with a price quote of 20.5 and 30 years until maturity. Assume semiannual compounding. Preferred stock: 150,000 shares of 7 percent preferred stock with a current price of $76, and a par value of $100. Common stock: 2,600,000 shares of common stock; the current price is $62, and the beta of the stock is 1.35. Market: The corporate tax rate is 30 percent, the market risk premium is 5 percent, and the risk-free rate is 2 percent. What is the WACC for the company?

Explanation / Answer

9% Debt Zero coupon bond Year Cash Flow Year Cashflow 0 -1095 0 -205 1 45 1 0 2 45 2 0 3 45 3 0 4 45 4 0 5 45 5 0 6 45 6 0 7 45 7 0 8 45 8 0 9 45 9 0 10 45 10 0 11 45 11 0 12 45 12 0 13 45 13 0 14 45 14 0 15 45 15 0 16 45 16 0 17 45 17 0 18 45 18 0 19 45 19 0 20 45 20 0 21 45 21 0 22 45 22 0 23 45 23 0 24 45 24 0 25 45 25 0 26 45 26 0 27 45 27 0 28 45 28 0 29 45 29 0 30 45 30 1000 31 45 IRR 5.42% 32 45 33 45 34 45 35 45 36 45 37 45 38 45 39 45 40 1045 IRR 4.0% Annual IRR 8.04% Cost of preferred Stock 9.21% Cost of Common Stock 8.75% 2+1.35*5 Cost od 9% Debt 8.04% Cost of Zero coupon Bond 5.42% Calculation of WACC Component Cost Amount Weight Weighted Cost Preferred Stock 9.21% 11400000 0.02 0.23% Common Stock 8.75% 161200000 0.35 3.05% 9% Debt 8.04% 60000000 0.13 1.04% Zero coupon Bond 5.42% 230000000 0.50 2.70% 462600000 7.02% WACC 7.02%

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