Question

WACC Assignment

FINA Company’s assets are $750 million, financed through bank loans, bonds, preferred stocks, and common stocks. The amounts are as follows:

Bank loans: $ 100 million borrowed at 5%

Bonds: $280 million, paying 8% coupon with semi-annual payments, and maturity of 10 years. FINA sold its $1,000 par-value bonds for $970 and had to incur $20 flotation cost per bond.

Preferred Stocks: $120 million, paying $15 dividends per share. FINA sold its preferred shares for $220 and had to incur $20/share flotation cost.

Common Stocks: $250 million, beta is 3.20, the risk-free rate is 5 percent, and the market rate is 10%.

If FINA is subject to a 30% tax rate, what is the WACC for FINA?

Please show all work. Also, can you specify which is the bank loan, bond, etc. Thank you in advance.

Answer 1

WACC = (weight of bank loan * cost of bank loan) + (weight of debt * cost of debt) + (weight of preferred stock * cost of preferred stock) + (weight of common stock * cost of common stock)

weight of bank loan = $100 million / $750 million = 0.1333

weight of debt = $280 million / $750 million = 0.3733

weight of preferred stock = $120 million / $750 million = 0.1600

weight of common stock = $250 million / $750 million = 0.3333

cost of bank loan = interest rate * (1 - tax rate) = 5% * (1 - 30%)

cost of bank loan = 3.5%

cost of debt = YTM of bond * (1 - tax rate)

YTM is calculated using RATE function in Excel with these inputs :

nper = 10*2 (10 years to maturity with 2 semiannual coupon payments each year)

pmt = 1000 * 8% / 2 (semiannual coupon payment = face value * annual coupon rate / 2. This is a positive figure as it is an inflow to the bondholder)

pv = -950 (net proceeds per bond = bond price - flotation cost = $970 - $20 = $950. This is a negative figure as it is an outflow to the buyer of the bond)

fv = 1000 (face value of the bond receivable on maturity. This is a positive figure as it is an inflow to the bondholder)

The RATE calculated is the semiannual YTM. To calculate the annual YTM, we multiply by 2. Annual YTM is 8.76%

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

cost of debt = 8.76% * (1 - 30%) ==> 6.13%

cost of preferred stock = (annual dividend / net proceeds per share)

net proceeds per share = price of share - flotation cost

net proceeds per share = $220 - $20 = $200

cost of preferred stock = $15 / $200 = 7.50%

cost of equity = risk free rate + (beta * (market return - risk free rate))

cost of equity = 5% + (3.2 * (10% - 5%)) ==> 21%

WACC = (weight of bank loan * cost of bank loan) + (weight of debt * cost of debt) + (weight of preferred stock * cost of preferred stock) + (weight of common stock * cost of common stock)

WACC = (0.1333 * 3.5%) + (0.3733 * 6.13%) + (0.1600 * 7.50%) + (0.3333 * 21%)

WACC = 10.96%