TAFKAP Industries has 4 million shares of stock outstanding selling at $17 per s
ID: 2741379 • Letter: T
Question
TAFKAP Industries has 4 million shares of stock outstanding selling at $17 per share, and an issue of $24 million in 7.5 percent annual coupon bonds with a maturity of 15 years, selling at 106 percent of par. Assume TAFKAP’s weighted average tax rate is 34 percent and its cost of equity is 15.0 percent.
What is TAFKAP’s WACC? (Do not round intermediate calculations and round your final answer to 2 decimal places.)
TAFKAP Industries has 4 million shares of stock outstanding selling at $17 per share, and an issue of $24 million in 7.5 percent annual coupon bonds with a maturity of 15 years, selling at 106 percent of par. Assume TAFKAP’s weighted average tax rate is 34 percent and its cost of equity is 15.0 percent.
Explanation / Answer
Selling price of bonds = Present value of coupon payments + Present value of face value
Present value of annuity of $1 = {1-(1+r)-n}/r
Present value of annual coupon payment of $75 = $75*{1-(1+r)-15}/r
Present value of face value = $1,000/(1+r)15
$1,060 = $75*{1-(1+r)-15}/r + $1,000/(1+r)15
Solving above, r = 0.0685
Cost of debt = 6.85%
After tax cost of debt = Cost of debt * (1-tax rate) = 6.85% * (1-0.34) = 4.52%
Market Value of equity = Number of shares outstand3ing * Selling price per share = 4 million shares * $17 = $68 million
Market value of debt = Face value * 106% = $24 million * 106% = $25.44 million
Total market value = $68 million + $25.44 million = $93.44 million
Equity weight = $68 million/$93.44 million = 0.7277
Debt weight = $25.44 million / $93.44 million = 0.2723
Weighted average cost of capital (WACC) = (Equity weight * Cost of equity) + (Debt weight * Cost of debt) = (15% * 0.7277) + (4.52%*0.2723) = 12.15%
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