a.)Given the following information about your firm’s capital structure, calculat

ID: 2761793 • Letter: A

Question

a.)Given the following information about your firm’s capital structure, calculate your firm’s WACC (assume the corporate tax rate is 35%).

Debt

Number of bonds outstanding = 10,000

price per bond = $1,165

par value per bond = $1,000

coupon rate = 6% (paid annually)

Years to maturity = 10

Common Stock

Number of shares outstanding = 1,000,000

Price per share = $25

Book value per share = $15

Beta = 1.4

Risk free rate = 4.5%

Market risk premium = 5%

8.66%

8.49%

9.11%

9.42%

7.93%

8.66%

8.49%

9.11%

9.42%

7.93%

Market Value of debt = 1165 * 10000 = 11,650,000

Market Value of equity =1,000,000 * 25 = 25,000,000

Total Value = 11,650,000 + 25,000,000 = 36,650,000

Weight of debt = Wd = 11,650,000/36,650,000 = 0.3179

Weight of equity = We =1 -0.3179 = 0.6821

Cost of equity = Re = Rf + beta*Market Risk premium = 4.5 + 1.4* 5 = 11.5%

Cost of debt (pre tax) = YTM calculated in excel =rate(nper,pmt,pv,fv) where nper =10, pmt = 6% *1000 = 60, PV =1165 and FV =1000

YTM =rate(10,60,-1165,1000) = 3.9689%

After tax cost of debt = pretax cost*(1-tax rate) = 3.9689%*(1-0.35) = 2.5798 = 2.58%

Hence WACC = Wd*Rd + We*Re

WACC = 0.3179 * 2.58% + 0.6821 * 11.5% = 8.66%

Answer : A: 8.66%

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