Viking Manufacturing has 3,509,366 shares of common stock outstanding. The curre

Question

Viking Manufacturing has 3,509,366 shares of common stock outstanding. The current share price is $14.57, and the book value per share is $9.75. Viking’s stock has a beta of 1.3 and the current yield on a 10 year U.S. Treasury bond is 2.52%, and the market risk premium is 13.15%. Viking also has two bond issues outstanding. The first bond issue has a face value of $11,953,339 and a coupon rate of 7.22% and sells for 143.1% of PAR value. The second issue has a face value of $4,188,691 and a coupon rate of 6.80% and sells for 140.0% of PAR value. The 7.22% coupon bond matures in 12 years; the 6.80% coupon bond matures in 24 years. Assume that the overall cost of debt is the weighted average implied by the two outstanding debt issues. Both bonds make semiannual payments. What's the WACC?

Explanation / Answer

Bond Issue #1 - Face 11,953,339, 7.22%, market price 143.1%, 10 yr term.
Market value 17,105,228.11, Annual interest paid 863,031.08 net cost / 17,105,228.11mil = 5.05%

Bond Issue #2 - Face 4,188,691, 6.80%, market price 140%, 12 yr term
Market value 5,864,167.40, Annual interest paid 284,830.99 / 5,864,167.40 = 4.86%

Common stock - 3,509,366 shs.
WACC -

EXPECTED RETURN

Ra =rf+beta*(rm-rf)

Ra =2.52%+1.3*(13.15%-2.52%) = 16.40%

Debt #1 - 17,105,228.11 mil x 5.05% = 863,814.02
Debt #2 - 5,864,167.40x 4.86% = 284,830.99

Common - 3,509,366 x $14.57 = 51,131,462.62 x 16.4% = 835,436,967.75

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