Question

WACC

Assume it is January 1, 2020.  Zelus Sport Shoe Company has three debt issues outstanding.

6.5% Notes December 31, 2028 ($200 million face value) Market price $980.05.

7.0% Bonds, maturing December 31, 2030 ($100 million face value) Market price $984.98.

7.5% Bonds, maturing December 31, 2036 ($200 million face value) Market price $1,029.15.

All bonds have a $1,000 face value and pay interest semi-annually.

Use a 5.0% risk-free rate and a 7.0% market risk premium to compute Zelus’s cost of equity.  The table shows the weekly closing prices for Zelus and the S&P 500 Index.  Last week Zelus’s stock closed at $99.75 per share.  There are 16 million shares of common stock outstanding.

The company also has 8 million shares of preferred stock outstanding.  The preferred stock pays an annual $5.00 dividend and current sells for $50 per share.  The tax rate is 30%.

Assume you are doing the WACC calculation on January 1, 2020, and that the semi-annual interest payments of the notes and bonds were paid on December 31, 2019.  Show your beta and the costs and weights of all of the WACC components in the table provided.  Show costs to 3 decimal places.

Date	Zelus	SP500
12/6/19	99.75	2066.50
11/29/19	101.25	2067.50
11/22/19	97.80	2063.50
11/15/19	102.50	2039.80
11/8/19	102.25	2031.95
11/1/19	98.50	2018.00
10/25/19	88.00	1964.65
10/18/19	87.00	1886.75
10/11/19	90.50	1906.10
10/4/19	89.75	1967.90
9/27/19	93.25	1982.85
9/20/19	89.00	2010.50
9/13/19	82.50	1985.50
9/6/19	85.00	2007.70

Beta (3 decimal places) = __________

Source of Capital	Amount	Before-tax Costs	After-tax Cost	Weight	Weighted Cost
6.5% Notes
7.0% Bonds
7.5% Bonds
Preferred Stock
Common Stock
TOTAL		-	-	WACC

Answer 1

The answer for this question is been solved in an excel and I am pasting it over here with detailed explanation and related formulas. The values are all filled in the table and the detailed calculation for these are done below.

Current Date	01-01-2020		Tax	30%
Source of Capital	Amount [Million]		Before-tax Costs		After-tax Cost		Weight		Weighted Cost
6.5% Notes	200		6.800%	=M14	4.760%	=E4*(1-$F$1)	8%	=C4/$C$9	0.381%
7.0% Bonds	100		7.200%	=M15	5.040%	=E5*(1-$F$1)	4%	=C5/$C$9	0.202%
7.5% Bonds	200		7.200%	=M16	5.040%	=E6*(1-$F$1)	8%	=C6/$C$9	0.404%
Preferred Stock	400	=50*8	10.000%	=C23	10.000%	=E7	16%	=C7/$C$9	1.603%
Common Stock	1,596	=99.75*16	11.490%	=C51	11.490%	=E8	64%	=C8/$C$9	7.347%
TOTAL	2,496	=SUM(C4:C8)	-		-			WACC	9.937%	=SUMPRODUCT(G4:G8,I4:I8)
Before-tax Cost of Debts
	Maturity	Number of periods to Maturity [Semi-Annual]	Amount	Face Value	Market Value	Coupon	[Formula]	Before Tax Cost of Debt	[Formula]
6.5% Notes	31-12-2028	18	$ 200 Million	1000	980.05	32.5	=6.5%*F14/2	6.800%	=RATE(D14,H14,-G14,F14,0)*2
7.0% Bonds	31-12-2030	22	$ 100 Million	1000	984.98	35	=7%*F15/2	7.200%	=RATE(D15,H15,-G15,F15,0)*2
7.5% Bonds	31-12-2036	34	$ 200 Million	1000	1029.15	37.5	=7.5%*F16/2	7.200%	=RATE(D16,H16,-G16,F16,0)*2
Cost of Preferred Stock
Preferred Dividend	5
Price of Preferred Stock	50
Cost	10.000%
Cost of Common Stock
Calculation of Beta
Date	Zelus	Zelus Returns	SP500		SP500 Returns
12-06-2019	99.75	1.5%	2066.5		0.0%
11/29/19	101.25	-3.4%	2067.5		-0.2%
11/22/19	97.8	4.8%	2063.5		-1.1%
11/15/19	102.5	-0.2%	2039.8		-0.4%
11-08-2019	102.25	-3.7%	2031.95		-0.7%
11-01-2019	98.5	-10.7%	2018		-2.6%
10/25/19	88	-1.1%	1964.65		-4.0%
10/18/19	87	4.0%	1886.75		1.0%
10-11-2019	90.5	-0.8%	1906.1		3.2%
10-04-2019	89.75	3.9%	1967.9		0.8%
9/27/19	93.25	-4.6%	1982.85		1.4%
9/20/19	89	-7.3%	2010.5		-1.2%
9/13/19	82.5	3.0%	1985.5		1.1%
09-06-2019	85	-	2007.7		-
Beta	0.927	=COVARIANCE.S(D31:D43,F31:F43)/VAR.S(F31:F43)
Risk Free Rate	5%
Market Risk Premium	7%
Cost of Equity	11.490%