In: Finance
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%