Question

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%

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Abdul-Rahim Taysir

Answer 1

The par value is traditionally set at 100, which represents 100% of a bond's $1,000 face value

I

Cost of Debt----I

Assume Debt is irredeemable Debt

Interest after tax

4.80

(8*60%)

Quoted Price

120

Cost of Debt

4.00%

(4.8/120) X 100

II

Cost of Debt----II(Zero Coupon Bond)

Yield To Maturity=(Face Value/Current Bond Price)^(1/Years To Maturity)-1

Zero-coupon bonds do not have reoccurring interest payments, which distinguishes yield to maturity calculations from bonds with a coupon rate

Price of Bond

185

Current Bond Price

27,750,000

(150000*185)

Face Value,M

15,000,000

Yield to maturity

2%

(Apply above formula)

Cost of Debt

2%

III

Cost of Preferred Stock

5%

IV

Cost of equity,E(Ri)

E(Ri) = Rf + ßi * (risk premium)

Risk Free rate (Rf)

4%

Risk Premium

7%

Beta,ßi

1.20

Cost of equity,E(Ri)

12%

Calculation of WACC

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