Question

The Saunders Investment Bank has the following financing outstanding. What is the WACC for the company?

1. Debt: 50,000 bonds with $1000 par value, a coupon rate of 4.7 percent, and a current price quote of 103.5 (103.5% of par value); the bonds have 20 years to maturity. 200,000 zero coupon bonds with $1000 par value, with a price quote of 17.5 and 30 years until maturity.

2. Preferred Stock: 125,000 shares of 4 percent preferred stock with a current price of $89, and a par value of $100.

3. Common Stock: 2,300,000 shares of common stock; the current price is $55, and the beta of the stock is 1.40.

Market: The corporate tax rate is 40 percent, the market risk premium is 7 percent, and the risk-free rate is 4 percent.

Answer 1

before tax cost of debt =using rate function in MS excel	rate(nper,pmt,pv,fv,type) nper = 20 pmt =1000*4.7% =47 pv =1000*103.5% =1035 fv=1000 type =0		4.65%
After tax cost of debt	before tax cost of debt*(1-tax rate)	4.65*(1-.4)	2.79
cost of zero coupon bond =(face value/current price)^(1/n) -1	(1000/175)^(1/30) -1	5.98%
After tax cost of zero coupon bonds	5.98*(1-.4)	3.59
cost of preferred stock = preferred dividend/market price	4/89	4.49%
cost of common stock = risk free rate+(market risk premium)*beta	4+(7)*1.4	13.8
WACC
Source	value = no of securities outstanding*market price	weight	component cost	weight*component cost
Coupon bond	51750000	0.230641	2.79	0.643487
Zero coupon bond	35000000	0.155989	3.59	0.56
preferred stock	11125000	0.049582	4.49	0.222624
common stock	126500000	0.563788	13.8	7.780279
total	224375000
WACC =sum of (weight*component cost)				9.21