Question

Inc has 200 million of shares outstanding trading at $10/share. The company has a beta of 1.2 and expected market return is 7%. T bill rate is 1.5%. the company has $25 million in interest expenses and a book value of debit of 125 million. The debt will mature in 12 years and it has a BB rating. The spread for a BB rating is 2.5 and the long term T bonds yield 4%. The company has an effective tax rate of 35%.

What is the company’s cost of equity?

What is its market value of equity?

What is the after tax cost of debit?

What is the market value of debit?

What is the company’s WACC?

Answer 1

Cost of equity=	Risk free rate + Beta * (Market rate - risk free rate)
Cost of equity=	1.5% + 1.2*(7%-1.5%)
Cost of equity=	8.100%
Market price	=10
No of shares	=200
Total Market value=	2000 million
Long term T bond yield	4.50%
BB rating top up spread	2%
Cost of debt	6.50%
Tax rate	35%
After tax cost of debt=	=6.5%*(1-35%)
After tax cost of debt=	4.225%
Annual interest	25
Cost of debt	6.50%
Market value of debt	=25/6.5%
Market value of debt	384.62
Component	Cost	Capital	Weight	Cost * Weight
Debt	8.10%	2,000	83.87%	6.79%
Equity	4.23%	385	16.13%	0.68%
		2,385	WACC	7.48%