Question

For Bonds
Years until maturity				25
Coupon rate (assume annual coupon payments)				8.40%
Face				1,000
Current Price				880
Number of bonds outstanding				18,000
For Preferred Stock
Price of Preferred Stock				34.85
Dividend on Preferred				4.18
Number or preferred shares outstanding				25,600
For Common Stock
Common price				26.34
Estimated growth rate in dividends				3.00%
Estimated dividend in one year				3.00
(Assume annual dividends)
Number of common shares outstanding				729,000
Tax rate				35.40%
What is WACC?
A Between 0.0% and 8.0%
B Between 8.0% and 10.0%
C Between 10.0% and 12.0%
D Between 12.0% and 16.0%

Answer 1

EXCEL FORMULA:

Working note:

Calculation of cost of debt:

FV = 1000
PV = 880
Nper = 25
PMT = 1000 * 8.40% = 84

Before tax cost of debt can be calculated by using the following excel formula:
=RATE(nper,pmt,pv,fv)
=RATE(25,84,-880,1000)
= $9.69%

After tax cost of debt = Before tax cost of debt * (1 - tax rate)
= $9.69% * (1 - 35.40%)
= 6.26%

Calculation of cost of preferred stock:

Cost of preferred stock = Annual dividend / current price
= 4.18 / 34.85
= 11.99%

Calculation of cost of common stock:

Cost of common stock = (D1 / P0) + g
= (3 / 26.34) + 3%
= 14.39%