Question

Easy Car Corp. is a grocery store located in the Southwest. It paid an annual dividend of ​$2.00 last year to its shareholders and plans to increase the dividend annually at the rate of 3.0​%. It currently has 1,000,000 common shares outstanding. The shares currently sell for ​$17 each. Five years ago, Easy Car Corp. issued 30,000 semiannual 27-year bonds with a coupon rate of 8​% and a par value of ​$1,000. The bonds currently have a yield to maturity​ (YTM) of 9%. What is the weighted average cost of capital (WACC) for Easy Car Corp. if the corporate tax rate is 40%?

Answer 1

WACC = 9.14%

Workings

Bond price	$904.91
Market values
Shares	17,000,000.00
Bonds	$27,147,242.54
Total MV	$44,147,242.54
Cost of shares=D1/P + g	15.12%
Cost of bonds after tax = YTM*(1-Tax)	5.40%
WACC	9.14%