The current stock price for a company is $32 per share, and there are 6 million

Question

The current stock price for a company is $32 per share, and there are 6 million shares outstanding. The beta for this firms stock is 1.4, the risk-free rate is 4.2, and the expected market risk premium is 5.7%. This firm also has 270,000 bonds outstanding, which pay interest semiannually. These bonds have a coupon interest rate of 8%, 11 years to maturity, a face value of $1,000, and a current price of 1,035.78. If the corporate tax rate is 31%, what is the Weighted Average Cost of Capital (WACC) for this firm?

Explanation / Answer

WACC= Kd * Kd*(1-t) + Ke * We

Kd = Cost of debt = YTM = rate( nper, pmt,pv) = 7.51%

Cost of Equity (ke) = 4.2+ 1.4* 5.7% = 12.18%

MV of debt = 1035.78* 270,000 = $ 279,660,600

MV of Equity = 32 * 6 = $ 192,000,000

MV of firm = $ 279,660,600 + $ 192,000,000 = $ 471,660,600

Debt to Value(kd) =$ 279,660,600/ $ 471,660,600 = 59%

Equity to value(ke) = 41%

WACC = 0.59 * 7.51*0.69 + 0.41*12.18% = 8.05%

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

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