The current stock price for a company is $44 per share, and there are 5 million

Question

The current stock price for a company is $44 per share, and there are 5 million shares outstanding. The beta for this firms stock is 1, the risk-free rate is 4.6, and the expected market risk premium is 5.7%. This firm also has 100,000 bonds outstanding, which pay interest semiannually. These bonds have a coupon interest rate of 8%, 28 years to maturity, a face value of $1,000, and an annual yield to maturity of 6.4%. If the corporate tax rate is 35%, what is the Weighted Average Cost of Capital (WACC) for this firm?

Explanation / Answer

value of equity=44*5000000=220000000

cost of equity=4.6%+1*5.7%=10.30%

value of the bond=((1000*8%/2)*((1-(1+(6.4%/2))^(-28*2))/(6.4%/2))+1000/(1+(6.4%/2))^(28*2))*100000=120715728.74

Weighted Average Cost of Capital (WACC) for this firm

=(220000000/(220000000+120715728.74))*10.30%+(120715728.74/(220000000+120715728.74))*6.4%*(1-35%)

=8.12%

the above is the answer

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