Question

Find the WACC for HHH Inc. using the following: The company has 10,000 coupon bonds oustanding selling at 104% of par, with a 7% coupon rate, semi-annual payments, $1,000 par value, and 20 years to maturity. Common stock has 200,000 shares outstanding, selling at $65 per share and a beta of 0.90. The company's tax rate is 40%. The risk-free rate of interest is 3.75% and there is a market risk premium of 5.5%. Calculate the cost of equity and the cost of debt.

Answer 1

WACC = x Re + x Rd x (1 – Tc)

Where:

• Re = cost of equity
• Rd = cost of debt
• E = market value of the firm’s equity
• D = market value of the firm’s debt
• V = E + D
• E/V = percentage of financing that is equity
• D/V = percentage of financing that is debt
• Tc = corporate tax rate

Re = Rf + (R_m - R_f )

R_f = Risk free rate of return

Rm - Rf = Market Risk Premium

= Beta

Re = Rf + (R_m - R_f )

Re = 3.75+0.90(5.5 )

Re = 3.75+4.95

Re = 8.7%

Rd = 7%

Rd after tax= 7 (1-.4) = 4.2%

E = 200000 shares * $65

E = $13000000

D = 10000 *104%*1000

D = 10400000

V = D+E

V = $10400000+$13000000

V = $23400000

WACC = x Re + x Rd x (1 – Tc)

WACC =(13000000/23400000) * 8.7 +(10400000/23400000) * 7*(1-.4)

WACC =(0.555) * 8.7 +(.444) * 4.2

WACC = 4.83 + 1.867

WACC =6.695%

WACC =6.7% approx