The current stock price for a company is $45 per share, and there are 4 million

Question

The current stock price for a company is $45 per share, and there are 4 million shares outstanding. The beta for this firms stock is 1.2, the risk-free rate is 4.6, and the expected market risk premium is 6%. This firm also has 230,000 bonds outstanding, which pay interest semiannually. These bonds have a coupon interest rate of 8%, 14 years to maturity, a face value of $1,000, and an annual yield to maturity of 8.9%. If the corporate tax rate is 38%, what is the Weighted Average Cost of Capital (WACC) for this firm? (Answer to the nearest hundredth of a percent, but do not use a percent sign).

Explanation / Answer

WACC = (Weight of debt * cost of debt) + (weight of equity * cost of equity)

After tax cost of capital;

Cost of Equity( Ke) :

under CAPM    = rf + B(ERm-RF) = .046 + 1.2(0.06) = 0.118

Cost of Debt :

YTM(1-T) = 0.089(1-0.38) = 0.05518

Weighted Average Cost of capital = 0.082757

Source of Capital Amount of Funds raised Weights of source After Tax cost of capital WACC Equity Capital $180,000,000 0.439 0.118 0.051802 Debt Capital $230,000,000 0.561 0.05518 0.030955 WACC 0.082757

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.