Question

In: Finance

ABC Co has 10 million shares of common stock outstanding which currently trades at a market...

ABC Co has 10 million shares of common stock outstanding which currently trades at a market price of $5 per share. The company also has 100,000 bonds issued which are trading at $1,050 per bond. ABC has not issued any preferred stock. If ABC’s cost of equity is 10% and their effective cost of debt is 5%, what is their WACC?

Expert Solution

Formula for calculating WACC = Kd * Wd + Ke * Wd

Kd = cost of debt

Wd = Weight of Debt

Ke = Cost of Equity

We = Weight of Equity

Weight of Equity and Debt

Wd (Weight of Debt) = (Total Debt ÷ Total Capital) x 100

= ($105,000,000 ÷ $155,000,000) x 100

=67.74%

We (Weight of Equity) = (Total Equity ÷ Total Capital) x 100

= (=$ 50,000,000 ÷$155,000,000) x 100

= 32.26%

Total Equity = Outstanding number of shares x Market selling price per share

= 10,000,000 shares x $5

=$ 50,000,000

Total Debt = $ 100,000 bonds x $1,050 per bond

= $ 105,000,000

Total Capital = Total Equity + Total Debt

=$50,000,000+$105,000,000

=$155,000,000

Final Answer
WACC = 6.613%

Formula for calculating WACC = Kd * Wd + Ke * Wd

Kd = cost of debt = 5%

Wd = Weight of Debt = 67.74%

Ke = Cost of Equity = 10%

We = Weight of Equity = 32.26%

WACC = (5% x 67.74%) + (10% x 32.26%)

= (.05 x .6774) + (.10 x .3226)

= 6.613%

Note:

Effective cost of debt given in the problem is considered as after tax cost of debt.

jeff jeffy answered 6 months ago

ABC Inc. has 10 million shares of common stock outstanding. The firm also has 1,200,000 shares...

ABC Inc. has 10 million shares of common stock outstanding. The firm also has 1,200,000 shares of 6 percent preferred stock (annual dividend=$6) and 300,000 semi-annual bonds of $1,000 face value with a coupon rate of 8 percent semiannual bonds outstanding. The bonds were issued five years ago with maturity of 30 years when they were issued. The market price of common stock is $46 per share and has a beta of 0.85, the preferred stock currently sells for $90...

ABC Industries has 5 million shares of common stock outstanding with a market price of $20.00...

ABC Industries has 5 million shares of common stock outstanding with a market price of $20.00 per share. The company also has 1 million shares outstanding preferred stock with a market price of $8.50 per share, and 200,000 bonds outstanding, each with a face vale $1,000 and selling at 97.5% par value. The cost of equity is 12%, the cost of preferred is 10%, and the cost of debt is 7.46%. If ABC's tax rate is 34% what is the...

26) ABC Inc. has 10 million shares of common stock outstanding. The firm also has1,200,000 shares...

26) ABC Inc. has 10 million shares of common stock outstanding. The firm also has1,200,000 shares of 6 percent preferred stock (annual dividend=$6) and 300,000 semi-annual bonds of $1,000 face value with a coupon rate of 8 percent semiannual bonds outstanding. The bonds were issued five years ago with maturity of 30 years when they were issued. The market price of common stock is $46 per share and has a beta of 0.85, the preferred stock currently sells for $90...

ABC Corporation has 1/2 million shares of common stock outstanding, 1 million shares of preferred stock,...

ABC Corporation has 1/2 million shares of common stock outstanding, 1 million shares of preferred stock, and 20,000 4.5% semiannual bonds outstanding. The common stock has a beta of 1.2. The corporate bond has a par value of $1,000 each and matures in 21 years. Currently the bonds are selling at 104% of their face values. The market risk premium is 10%. The risk-free rate is 2.5%. The common stock sells for $75 per share. The preferred stock sells for...

A company has $119 million in outstanding bonds, and 10 million shares of stock currently trading...

A company has $119 million in outstanding bonds, and 10 million shares of stock currently trading at $39 per share.The bonds pay an annual coupon rate of 6% and is trading at par. The company's beta is 0.9, its tax rate is 40%, the risk-free rate is 4%, and the market risk premium is 5%. What is this firm's WACC?

A company has $105 million in outstanding bonds, and 10 million shares of stock currently trading...

A company has $105 million in outstanding bonds, and 10 million shares of stock currently trading at $36 per share.The bonds pay an annual coupon rate of 9% and is trading at par. The company's beta is 0.8, its tax rate is 40%, the risk-free rate is 2%, and the market risk premium is 6%. What is this firm's WACC?

A company has $107 million in outstanding bonds, and 10 million shares of stock currently trading...

A company has $107 million in outstanding bonds, and 10 million shares of stock currently trading at $40 per share.The bonds pay an annual coupon rate of 5% and is trading at par. The company's beta is 1.2, its tax rate is 40%, the risk-free rate is 3%, and the market risk premium is 4%. What is this firm's WACC?

Google currently has a 5 million common shares outstanding, and a 1 million preferred shares outstanding,...

Google currently has a 5 million common shares outstanding, and a 1 million preferred shares outstanding, and 100,000 bonds outstanding. Calculate Google Weighted Average Cost of Capital (WACC) if the corporate tax rate is 35%. (Using excel and making formulas viewable) The average cost of equity of Google is 19.04%. The cost of Google’s preferred stocks if it is currently priced at $100 is 6%. The pre-tax cost of debt of Google is 6.85%.

ABC Corporation has 14 million shares of common stock outstanding, 900,000 shares of 8 percent preferred...

ABC Corporation has 14 million shares of common stock outstanding, 900,000 shares of 8 percent preferred stock outstanding and 220,000 semiannual bonds outstanding with coupon rate of 12% and par value of $1,000 each. The common stock currently sells for $42 per share and has a beta of 1.20, the preferred stock currently sells for $80 per share, and the bonds have 17 years to maturity and sell for 119.92 percent of par. The expected return on the market portfolio...

Suppose a firm has 10 million shares of common stock outstanding at a price of $40...

Suppose a firm has 10 million shares of common stock outstanding at a price of $40 per share. The firm also has 300,000 bonds outstanding with a current price of $1050. The outstanding bonds have yield to maturity 7.1%. The firm's common stock beta is 1.4 and the corporate tax rate is 35%. The expected stock market return is 10% and the T-bill rate is 1.5%. What is the WACC for this firm? (Enter your answer to 4 decimal places...