Question

Given the following information for Kose, Inc, find the WACC. Assume the company’s tax rate is 35%. Debt: 10,000 9% coupon bonds outstanding, $1,000 par value, 25 years to maturity, currently selling for 100% of par, and the bonds make annual payments. Common stock: 200,000 shares outstanding, selling for $60 per share; the beta is 1.15. Market: 7% market risk premium and 3% risk-free rate.

Answer 1

Answer = 8.69%

Note:

The Approximate Yield to Maturity Formula =[Coupon + ( Face Value - Market Price) / Number of years to maturity] / [( Face Value + Market Price)/2 ] *100

Since this formula gives an approximate value, the financial calculators can be used alternatively.

where,

Par Value = $ 1,000

Market Price = $  1000

Annual rate = 9% and

Maturity in Years = 25 Years

Hence the yield to maturity = 9%

Now, the after tax cost of debt = Yield to Maturity * (1- tax Rate)

= 9.00% * ( 1-35%)

= 5.85%

Cost of Equity = risk free rate + market risk premium * beta

=3%+7%*1.15

= 11.05%

Debt = 10,000 * $ 1,000

Equity = 200,000*$ 60

WACC = (Cost of Debt * Weight of Debt) + (Cost of Equity * Weight of Equity)

= 8.69%

	Value	Weight ( market value / total)	Cost	Weight *cost
Debt	1,00,00,000.00	0.45	5.85%	2.66
Equity	1,20,00,000.00	0.55	11.05%	6.03
Total	2,20,00,000.00		WACC	8.69