Question

a company needs 1 billion financing for development. estimate the cost of capital. 20 years bonds mature in 10 years. currently a coupon rate of 8%, paid semi annually. the price of bonds today is 1200$ with 2500 bonds on the market. new common shares can be issued for 30$ with a cost of $2. dividends paid out this year for 1.80$. the growth rate is estimated at 7%. there are 300 000 common shares on market today. corporate tax is 30%. what is the WACC and show your work. calculate without using excel.

Answer 1

Using financial calculator BA II Plus - Input details:	#
FV = Future Value =	-$1,000.00
PV = Present Value =	$1,200.00
N = Total number of periods = Number of years x frequency =	20
PMT = Payment = Coupon / frequency =	-$40.00
CPT > I/Y = Rate per period or YTM per period =	2.693
Convert Yield in annual and percentage form = Yield*frequency / 100 =	5.39%
After tax Cost of debt = YTM x (1-Tax) = Yeild x (1-30%) =	3.77%

Equity cost using DDM	#
Existing growth rate = g =	7.00%
Expected dividend = D1 = D0*(1+g) = 1.80 x (1+7%)	1.926
Expected rate = r =	?
Current stock price = P0 =	30.00
Flotation cost = f =	2.00
Formula for calculating the Expected rate:
r = (D1/(P0-f))+g = (1.926/(30-2))+7% =	13.88%

Weights ; Market weight = Market value / Total of Market value

Particulars	Price	Quantity	Price x Quantity	Market weights
Debt	$1,200.00	2,500	3,000,000.00	0.250000
Equity	$30.00	300,000	9,000,000.00	0.750000
		Total	12,000,000.00

.Equity weight = 9m/12m = 75% ; Debtweight = 25%

.

WACC = Cost of equity x Weight of equity + Cost of debt x Weight of debt

WACC = 13.88% x 0.75 + 3.77% x 0.25

WACC = 11.35%