Question

In: Finance

The market risk premium is 9.4% and the risk free rate is 2.6%. Firm X has...

The market risk premium is 9.4% and the risk free rate is 2.6%. Firm X has an equity beta of 1.30. Its 6.4 million ordinary shares are currently priced at $27.35 each. Firm X also has 1.9 million preference shares outstanding, which each have a price of $24.05 and pay an annual dividend of $2.89/share. It also has 840 zerocoupon bonds outstanding; each maturing 3 years from now. Each bond has a face value of $75,000 and a current price of $59,295. The firm’s marginal tax rate is 38%. Question 11 Which of the following is closest to Firm X’s WACC?

a. 12.55% b. 13.12% c. 10.36% d. 12.20% e. 11.89%

Solutions

Expert Solution

Option c. 10.36% is close to WACC which is 8.76% when calculated using book value weights.

Option b. 13.12% is close to WACC which is 24.76% when calculated using market value weights.

Face value per share of preference shares and equity shares are assumed to be $10.


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