Question

Ten Pins Manufacturing has 9.2 million shares of common stock outstanding. The current share price is $62, and the book value per share is $4. The company also has two bond issues outstanding. The first bond issue has a face value of $71.8 million and a coupon rate of 7.9 percent and sells for 107.4 percent of par. The second issue has a face value of $61.8 million and a coupon rate of 8.4 percent and sells for 110.7 percent of par. The first issue matures in 8 years, the second in 27 years.
The company’s stock has a beta of 1.2. The risk-free rate is 4 percent, and the market risk premium is 7.9 percent. Assume that the overall cost of debt is the weighted average implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 35 percent. What is the company’s WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

What is WACC?

Answer 1

MV of equity=Price of equity*number of shares outstanding

MV of equity=62*9200000

=570400000

MV of Bond1=Par value*bonds outstanding*%age of par

MV of Bond1=1000*71800*1.074

=77113200

MV of Bond2=Par value*bonds outstanding*%age of par

MV of Bond2=1000*61800*1.107

=68412600

MV of firm = MV of Equity + MV of Bond1+ MV of Bond 2

=570400000+77113200+68412600

=715925800

Weight of equity = MV of Equity/MV of firm

Weight of equity = 570400000/715925800

W(E)=0.7967

Weight of debt = MV of Bond/MV of firm

Weight of debt = 145525800/715925800

W(D)=0.2033

Cost of equity

As per CAPM

Cost of equity = risk-free rate + beta * (Market risk premium)

Cost of equity% = 4 + 1.2 * (7.9)

Cost of equity% = 13.48

Cost of debt

Bond1

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =8x2

1074 =∑ [(7.9*1000/200)/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^8x2

k=1

YTM1 = 6.6904451169

Bond2

K = Nx2

Bond Price   =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =27x2

1107 =∑ [(8.4*1000/200)/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^27x2

k=1

YTM2 = 7.47

Firm cost of debt=YTM1*(MV bond1)/(MV bond1+MV bond2)+YTM2*(MV bond2)/(MV bond1+MV bond2)

Firm cost of debt=6.6904451169*(77113200)/(77113200+68412600)+7.47*(77113200)/(77113200+68412600)

Firm cost of debt=7.06%

After tax cost of debt = cost of debt*(1-tax rate)

After tax cost of debt = 7.06*(1-0.35)

= 4.589

WACC=after tax cost of debt*W(D)+cost of equity*W(E)

WACC=4.59*0.2033+13.48*0.7967

WACC =11.67%