In: Finance
Given the following information for Jalen Inc. Assume the firm has a tax rate of 30%. Debt: 250,000 bonds outstanding with 4.5% coupon rate. Par value of $1,000 per bond, 15 years to maturity, selling for 105% of par; the bonds make semi-annual payments. Common stock: 8,500,000 shares outstanding, trading for $55.75 per share. The beta is 1.33. Market: 12% expected return on the market and 3.5% risk free rate. Calculate the weighted average cost of capital (WACC). (Enter percentages as decimals and round to 4 decimals)
Particulars |
Market price |
Quantity |
Market value |
Weights |
Equity |
55.75 |
8,500,000 |
473,875,000 |
64.3524% |
Debt |
1050.00 |
250,000 |
262,500,000 |
35.6476% |
Total |
736,375,000 |
100.00% |
Cost of equity can be determined from CAPM equation:
Cost of equity = Risk free rate + Beta x (Market return – Risk free rate)
Cost of equity = 3.5% + 1.33 x (12% - 3.5%)
Cost of equity = 14.8050%
Now, we can calculate the cost of debt:
Using financial calculator BA II Plus - Input details: |
# |
FV = Future Value = |
$1,000 |
PV = Present Value = |
-$1,050 |
N = Total number of remaining payment periods = |
30 |
PMT = Payment = |
$22.5 |
CPT > I/Y = Rate = |
2.025953 |
Convert Yield in annual and percentage form = Yield x 2 x 100 |
4.051906% |
Cost of debt = 4.051906%
Finally, we can calculate now WACC:
WACC = Cost of equity x Weight of equity + Cost of debt x Weight of debt x (1-Tax)
WACC = 14.8050% x 64.3524% + 4.051906% x 35.6476% x (1-30%)
WACC = 10.5385%