Calculate the WACC for Zee Corp. Zee’s has primarily long-term debt, currently t
ID: 2814758 • Letter: C
Question
Calculate the WACC for Zee Corp. Zee’s has primarily long-term debt, currently trading at 950.25/bond. The 8% coupon, 25 year bonds have 12 years left to maturity. Zee’s preferred annual dividend is $2.55, and its preferred stock is currently trading at $32.00/share, 8,000 shares outstanding. Zee just paid common dividend of $1.66/share and is growing at a constant rate of 8.5% annually. Zee’s stock is priced at $23.50/share, and it has 35,000 shares of common stock outstanding. Zee’s total capital is $1.6 million and it is in the 32% marginal tax bracket.
Explanation / Answer
Cost of debt:
Using financial calculator BA II Plus - Input details:
#
FV = Future Value / Face Value =
-$1,000.00
PV = Present Value =
$950.25
N = Number of years remaining x frequency =
12
PMT = Payment = Coupon / frequency =
-$80.00
CPT > I/Y = Rate per period or YTM per period =
8.683732
Convert Yield in annual and percentage form = Yield*frequency / 100 =
8.683732%
Cost of preferred share:
Cost of preferred = Dividend / Price of preference
Cost of preferred = 2.55 / 32
Cost of preferred = 7.968750%
Cost of equity:
Cost of equity = Dividend x (1+Growth rate)/ Price of equity + Growth rate
Cost of equity = 1.66 x (1+ 8.5%)/ 23.50 + 8.5%
Cost of equity = 16.164255%
-----
Weights of each capital components:
Debt is balancing figure since we know total capital = $1.6 million = 1,600,000.00
Particulars
Price
Quantity
Price x Quantity
Weight
Equity
$23.50
35,000.00
822,500.00
51.406250%
Debt (Balance)
$950.25
-
521,500.00
32.593750%
Preferred
$32.00
8,000.00
256,000.00
16.000000%
Total
1,600,000.00
-----
WACC = Cost of equity x Weight of equity + Cost of preferred share x Weight of preferred share + Cost of debt x Weight of debt x (1-Tax rate)
WACC = = 16.164255% x 51.406250% + 7.968750% x 16.000000% + 8.683732% x 32.593750% x (1-32%)
WACC = 11.509078% or 11.51%
Using financial calculator BA II Plus - Input details:
#
FV = Future Value / Face Value =
-$1,000.00
PV = Present Value =
$950.25
N = Number of years remaining x frequency =
12
PMT = Payment = Coupon / frequency =
-$80.00
CPT > I/Y = Rate per period or YTM per period =
8.683732
Convert Yield in annual and percentage form = Yield*frequency / 100 =
8.683732%
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