Question

The current stock price for a company is $48 per share, and there are 5 million shares outstanding. The beta for this firms stock is 1.2, the risk-free rate is 4.2, and the expected market risk premium is 6.4%. This firm also has 120,000 bonds outstanding, which pay interest semiannually. These bonds have a coupon interest rate of 6%, 10 years to maturity, a face value of $1,000, and an annual yield to maturity of 8.1%. If the corporate tax rate is 38%, what is the Weighted Average Cost of Capital (WACC) for this firm? (Answer to the nearest hundredth of a percent, but do not use a percent sign).

Answer 1

Cost of equity = Risk free rate + Beta x Market risk premium

Cost of equity = 4.2% + 1.2 x 6.4%

Cost of equity = 11.88%

Cost of debt = YTM = 8.1%

Bond value:

Using financial calculator BA II Plus - Input details:	#
I/Y = Rate or yield / frequency of coupon in a year =	4.050000
PMT = Coupon rate x FV / frequency =	-$30.00
N = Number of years remaining x frequency =	20.00
FV = Future Value =	-$1,000.00
CPT > PV = Present value of bond =	$857.9313

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Particulars	Price	Quantity	Price x Quantity	Weight
Equity	$48.00	5,000,000.00	240,000,000.00	69.980688%
Debt	$857.9313	120,000.00	102,951,756.00	30.019312%
		Total	342,951,756.00

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After tax cost of capital / WACC = Cost of equity x Weight of equity + Cost of debt x Weight of debt x (1-Tax rate)

After tax cost of capital / WACC = 11.88% x 69.980688% + 8.1% x 30.019312% x (1-38%)

After tax cost of capital / WACC = 9.82%

After tax cost of capital / WACC = 9.82 percent