Match the Weighted Average Cost of Capital to each of the scenarios given for AB

Question

Match the Weighted Average Cost of Capital to each of the scenarios given for ABC Corporation v Target capital structure: 47% debt, 8% preferred stock and 45% common equity. Yield to A 7.91% B. 9.18% C. 8.50% D. 8.42% maturity on bonds: 8.0%; Preferred stock dividend: $6.40 per year, current market price of preferred stock is $68.90. CAPM data for common equity: risk-free rate is 3.0%; market risk premium for the average stock is 8.0%; ABC has a beta of 1.13. ABC's marginal tax rate is 40% 8 v Target capital structure: 51% debt, 5% preferred stock and 44% common equity. Yield to maturity on bonds: 5.2%; Preferred stock dividend: $7.04 per year, current market price of preferred stock is $69.54. CAPM data for common equity: risk-free rate is 4.9%; market risk premium for the average stock is 6.3%; ABC has a beta of 1.32. ABC's marginal tax rate is 40% Target capital structure : 51 maturity on bonds: 7.0%; Preferred stock dividend: $6.97 per year, current market price of preferred stock is $69.47. CAPM data for common equity: risk-free rate is 4.0% market risk premium for the average stock is 4.1%; ABC has a beta of 2.22. ABC's marginal tax rate is 40% Target capital structure: 52% debt, 6% preferred stock and 42% common equity. Yield to maturity on bonds: 7.1%; Preferred stock dividend: $7.22 per year, current market price of preferred stock is $69.72. CAPM data for common equity: risk-free rate is 3.9%; market risk premium for the average stock is 7.6%, ABC has a beta of 1.26 ABC's marginal tax rate is 40% V % debt, 8% preferred stock and 41% common equity. Yield to 9 Target capital structure 38% debt, 6% preferred stock and 56% common equity. Yield to maturity on bonds: 4.3%; Preferred stock dividend: $7.27 per year, current market price of preferred stock is $69.77. CAPM data for common equity: risk-free rate is 4.9% market risk premium for the average stock is 9.7%; ABC has a beta of 0.89. ABC's marginal tax rate is 40%

Explanation / Answer

Answer 1) Since All The questions are similar in nature I have shown the full calculation for first part

Now, WACC is calculated as =

Weight of debt * Cost of debt * (1-tax rate) + Weight of equity * cost of equity + Weight of preferred share * cost of preferred share

Weight of debt = 47%

Weight of equity = 45%

Weight of Preferred share = 8%

Cost of debt = YTM of bond = 8%

Cost of preferred share = Preferred share dividend / Price of preferred share = 6.4/68.9 = 9.29%

Cost of equity = Risk free rate + Beta * Market risk premium = 3%+ 1.13*8% = 12.04%

WACC = 47%*8%*(1-40%) + 8%*9.29%+ 45%*12.04% = 8.42%

So, WACC for first part is 8.42% D)

Similary, I calculated the wacc for all the parts

WACC for Option 2) is A) i.e 7.91%

WACC for Option 3) is E) i.e 8.32%

WACC for Option 4) is C) i.e 8.50%

WACC for Option 5) is B) i.e 9.18%

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