Vedder, Inc., has 6.1 million shares of common stock outstanding. The current sh
ID: 2754177 • Letter: V
Question
Vedder, Inc., has 6.1 million shares of common stock outstanding. The current share price is $61.10, and the book value per share is $4.10. Vedder also has two bond issues outstanding. The first bond issue has a face value of $70.1 million, a coupon rate of 7.1 percent, and sells for 97.5 percent of par. The second issue has a face value of $35.1 million, a coupon rate of 6.6 percent, and sells for 96.5 percent of par. The first issue matures in 21 years, the second in 13 years. The most recent dividend was $2.90 and the dividend growth rate is 7 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 34 percent.
What is the company’s WACC? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Required:What is the company’s WACC? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Explanation / Answer
Cost of equity = (D1 / P0) + g , where d1 = D0* (1+ g)
= $2.90(1 + 0.07)/ $61.1 + 0.07
= 12.1%
Cost of Debt =[ interest *(1- Tax) + (R.V.-M.P./n) ] / (R.V. + M.P./2)
Cost of Debt (first bond) = [4.9771*(1- 0.34) + (70.1-68.3475/21)] / (70.1+ 68.3475/2)
= 4.86
Cost of Debt (second bond) = [2.3166* (1 -0.34) + (35.1- 33.8715/13)] / (35.1+33.8715/2)
= 10.99 %
Total capital employed = shareholders fund + debt fund
= (6.1 million shares*$4.10) + $70.1 million + $35.1 million
= 130.21
WACC = weight of equity * Cost of equity + weight of debt * Cost of Debt
= (12.1% * 25.01/130.21) + (4.86 %* 70.1/130.21) + ( 10.99%* 35.1/130.21)
= 7.9%
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