Question

In: Finance

calculate the WACC for this company the company has 100000 of common shares outstanding and each...

calculate the WACC for this company the company has 100000 of common shares outstanding and each share is currently trading at $40 the company paid an annual dividend of $10 last year to its shareholders and plans to increase the dividend annually at the rate of 2% forever. the company also has 5,000 semi annual bonds outstanding with a coupon rate of 9.4625%, a maturity of 25 years, and a par value of $1,000. the bonds currently have a yield to maturity of 12%. the corporate tax rate is 30%.

what is the cost of debt for the company?
how many interest payments are left for the bond of the company ?
what is the interest payment per period for the bond ?
what is the discount rate per period to use in pricing the bonds ?
what is the market value of equity for the calculation of the WACC for the company ?
what is the cost of equity for the company ?
what is the market value of debt to be used in the calculation of the wacc for the company ?
what is the value of d/v?
what is the weighted average cost of capital (WACC) for the company ?

Solutions

Expert Solution

a). After-tax cost of debt = yield to maturity*(1-Tax rate) = 12%*(1-30%) = 8.40%

b). It is a semi-annual bond with maturity of 25 years left so it will pay 2 coupons p.a. for 25 years. Number of payments left are 25*2 = 50

c). Interest payment per period = coupon rate*par value/2 = 9.4625%*1,000/2 = 47.3125

d). Discount rate per period = annual yield/number of periods in a year = 12%/2 = 6%

e). Market value of equity = number of shares*price per share = 100,000*40 = 4,000,000 or 4 million

f). Cost of equity = (D0*(1+g)/P0) + g = (10*(1+2%)/40) + 2% = 27.50%

g). Bond price: FV (par value) = 1,000; PMT (semi-annual coupon) = 47.3125; N (number of payments) = 50; rate (semi-annual rate) = 12%/2 = 6%, solve for PV.

Bond price = 800.02

Market value of debt = number of bonds*bond price = 5,000*800.02 = 4,000,106.97

h). d/v = debt value/total capital value = debt value/(equity value + debt value) = 4,00,106.97/(4,000,106.97+4,000,000) = 50.0007%

i). WACC = (d/v*after-tax cost of debt) + (e/v*cost of equity)

= (50.0007%*8.40%) + (49.9993%*27.50%) = 17.95%


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