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%

Please Solve As soon as
Solve quickly I get you two UPVOTE directly
Thank's
Abdul-Rahim Taysir

Answer 1

All amounts are in $

Cost of debt (for 40,000 bonds) (taken as annual coupons)

1200 = 80 (PVIFA at r%, 25 periods) + 1000 (PVIF at r%, 25th period)

r = 6.379%

This is pre tax cost of debt

Post tax cost of debt = 6.379% x (1-tax rate)

= 6.379% x (1-40%)

= 3.8274%

Cost of debt of Zero Coupon Bond

YTM = [ face value/price ]^(1/30) - 1

YTM = [ 1000/185 ]^(1/30) - 1

YTM = 5.785%

Post tax cost of debt = 5.785% (1-04) = 3.471% (because the Imputed interest is subjected to tax every year)

Cost of preferred stock = Expected Dividend/Price

= 5/78

= 6.41%

Common stock cost (using CAPM)

= Risk free rate + Beta (market risk premium)

= 4% + 1.2 (7%)

= 12.4%