Question

Calculate the Weighted Average Cost of Capital (WACC) for the following capital structure:

• 4,000 bonds with par value of $2,000 and market value of $1,800. The coupon of 10% with a tax rate of 50%.

• 400,000 common shares with par value of $70 per share and market value of $76 per share. The cost of common shares is 24%.

• 20,000 preferred shares with par value of $200 per share and market value of $200 per share. The dividend per share equal to $24.

Answer 1

WACC = 19.65%

Explanation

For computing the WACC, we need to compute the individual cost of capitals for debt (Kd), Equity ( Ke) and Preferred capital (Kp).

Cost of debt (Kd) i= Coupon Interest ./ Market value * 100

NOTE: When, life of the bond is not give, we can use current yield as the cost of debt instead of computing YTM.

= 2000 * 10% / 1800 * 100

= 11.11%

Cost of debt ( after tax ) = 11.11 * ( 1 - 0.50) = 5.56%

Cost of Equity = 24% ( is given)

Cost of preferred capital = Dividend / Market price * 100

= 24 / 200 * 100

= 12%

CALCULATION OF WACC

	Market
Source	Value	K	W	K*W
Bonds	7200000	5.56	0.173077	0.962308
Equity	30400000	24	0.730769	17.53846
Preferred capital	4000000	12	0.096154	1.153846
Total	41600000		WACC =	19.65

Market values are computed by multiply the number with market price.

Bonds = 4000 * 1800 = 7200,000

Equity = 400,000 * 76 = 30400,000

Preferred capital = 20,000 * 200 - 4000,000

Weights are computed as ....... Individual amounts / 41600,000