Question

Use the information below to determine the firms cost of debt, cost of equity, and WACC. Use market values to determine the weights.

? The expected return on the market portfolio is 11% and the risk-free rate is 3%. The firm’s beta is 1.6.

? The firm has most recently paid a dividend of $2. Dividends are expected to grow at a rate of 3% per year, indefinitely.

? The firm has 1.5 million shares of common stock outstanding.

? The firm has two bond issues outstanding:

1. 10,000 bonds with 5% coupon, 6% YTM, and face value of $1000 that mature in 8 years

2. 50,000 bonds with 3% coupon, 4% YTM, and face value of $1000 that mature in 12 years.

? The firm’s average tax rate is 30%.

Answer 1

cost of debt (Kd)= wieghted average Coupon rate of bonds *(1-tax%)
kd	2.333333

cost of equity (Ke)= Rf+(Rm-Rf)?
Ke=	3+(11-3)1.6
Ke=	15.8

Value of share = d(1+g)/(ke-g)
Value of share =		2(1.03)/(.158-.03)
Value of share =		$                   16.09
Value of equity=		value of share x number of shares outstanding
Value of equity=		$                   24.14million
Value of debt		$                   60.00million
Total		$                   84.14million
We=	0.286908	Wd= 0.713092
WACC=	Wd x Kd + We x Ke
WACC=	6.20	%