Vedder, Inc., has 7 million shares of common stock outstanding. The current shar

Question

Vedder, Inc., has 7 million shares of common stock outstanding. The current share price is $62.00, and the book value per share is $5.00. Vedder also has two bond issues outstanding. The first bond issue has a face value of $71 million, a coupon rate of 7 percent, and sells for 93 percent of par. The second issue has a face value of $36 million, a coupon rate of 7.5 percent, and sells for 92 percent of par. The first issue matures in 20 years, the second in 12 years. The most recent dividend was $3.35 and the dividend growth rate is 6 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 35 percent. What is the company’s WACC?

Explanation / Answer

Here is the basic formula for weighted average cost of capital:

WACC = ((E/V) * Re) + [((D/V) * Rd)*(1-T)]

E = Market value of the company's equity
D = Market value of the company's debt
V = Total Market Value of the company (E + D)
Re = Cost of Equity
Rd = Cost of Debt
T= Tax Rate

Market value of equity = 7 million *62 = $ 434 millions

market value of debt = (71*0.93)+(36*0.92)

=$99.15 millions

Re cost Of equity = ((3.35*1.06)/62)*100

= 5.7274%

Cost of debt =( 7-(7*0.35)+ 7.5-(7.5*0.35))/2

= 4.7125

WACC= ((434/533.15) *5.7274) + ((99.15/533.15 )*4.7125)

=4.6622+0.8764

=5.5386%

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