In: Finance
The charter company has the following financing outstanding.
What is the WACC for the company?
Debt: 40,000 bonds with a 8% coupon rate and a current price quote
of 1200 the bonds have 25 years to maturity. 150,000 zero coupon
bonds with a price quote of 185 and 30 years to maturity.
Preferred Stock: 100,000 shares of 5% preferred stock with a
current price of $78, and a par value of $100.
Common Stock: 1,800,000 shares of Common Stock; the current price
is $75. And the beta of the stock is 1.2.
Market: The corporate tax rate is 40%, the market risk premium is
7%, and the risk free rate is 4%
Please Solve As soon as
Solve quickly I get you two UPVOTE directly
Thank's
Abdul-Rahim Taysir
Calculation of cost:
i). Cost of coupon bond: PV (current price) = -1,200; FV (par value) = 1,000; PMT (annual coupon) = coupon rate*par value = 8%*1,000 = 80; N (number of coupons) = 25*2 = 50, solve for RATE.
Annual yield = 6.38%
After-tax cost of coupon bond = annual yield*(1-Tax rate) = 6.38%*(1-40%) = 3.83%
ii). Cost of zero coupon bond = [(maturity value/current price)^(1/number of years to maturity)] -1
= [(1,000/185)^(1/30)]-1 = 5.79%
After-tax cost of zero coupon bond = annual yield*(1-Tax rate) = 5.79%*(1-40%) = 3.47%
iii). Cost of preferred stock = annual dividend/current price per share = (dividend rate*par value)/price per share
= (5%*100)/78 = 6.41%
iv). Cost of common stock (using CAPM) = risk-free rate + beta*market risk premium
= 4% + 1.2*7% = 12.40%
Calculation of weight:
i). Market value of coupon bond = number of bonds*current price = 40,000*1,200 = 48,000,000
ii). Market value of zero coupon bond = number of bonds*current price = 150,000*185 = 27,750,000
iii). Market value of preferred stock = number of shares*current price = 100,000*78 = 7,800,000
iv). Market value of common stock = number of shares*current price = 1,800,000*75 = 135,000,000
Total capital = sum of all market values = 48,000,000 + 27,750,000 + 7,800,000 + 135,000,000 = 218,550,000
Weight of coupon bond = market value of coupon bond/total capital = 48,000,000/218,550,000 = 0.2196
Weight of zero coupon bond = market value of zero coupon bond/total capital = 27,750,000/218,550,000 = 0.1270
Weight of preferred stock = market value of preferred stock/total capital = 7,800,000/218,550,000 = 0.0357
Weight of common stock = market value of common stock/total capital = 135,000,000/218,550,000 = 0.6177
WACC calculation:
WACC = sum of (weight*cost of capital)
= (0.2196*3.83%) + (0.1270*3.47%) + (0.0357*6.41%) + (0.6177*12.40%) = 9.17% (Answer)