Question

1.You decide to buy a house for a total of $198842. To get a mortgage loan, you make a 10% down payment, and the bank will lend you the rest. The interest rate quoted for this loan is 6% APR, and the loan will be paid (and interest compounded) every month, for the next 30 years. How much is the TOTAL monthly payment for this mortgage?

2.A company has $96 million in outstanding bonds, and 10 million shares of stock currently trading at $37 per share.The bonds pay an annual coupon rate of 5% and is trading at par. The company's beta is 0.8, its tax rate is 40%, the risk-free rate is 3%, and the market risk premium is 4%. What is this firm's WACC?

Answer 1

Value of home = $198,842

Down Payment = 10%

Value of mortgage Loan = $198,842 × (1- 10%)

= $178,957.80.

Value of Mortgage loan is $178,957.80.

Monthly Payment on Mortgage loan is calculated in excel and screen shot provided below:

Monthly Payment on Mortgage loan is $1,072.94.

2.

Value of bond = $96 million.

Value of equity = 10 million × $37

= $370 million

Value of total Capital = $96million + $370 million

= $466 million.

Market Value of total capital is $466 million.

Weight of debt = 20.60%

Weight of equity = 79.40%

Before tax cost of debt = 5%

Tax rate = 40%

After tax cost of debt = 5% × (1 - 40%)

= 3%

After tax cost of debt is 3%

Cost of equity = 3% + (4% × 0.80)

= 3% + 3.20%

= 6.20%

Cost of equity is 6.20%.

Now, WACC is calculated below:

WACC = (20.60% × 3%) + (79.40% × 6.20%)

= 0.62% + 4.92%

= 5.54%

WACC of company is 5.54%.