Question

Suppose a firm has 30.20 million shares of common stock outstanding at a price of $45.42 per share. The firm also has 419,000.00 bonds outstanding with a current price of $1,051.00. The outstanding bonds have yield to maturity 6.52%. The firm's common stock beta is 0.986 and the corporate tax rate is 39.00%. The expected market return is 12.52% and the T-bill rate is 4.00%.

Compute the following:

a. Weight of equity of the firm:

b. Weight of debt of the firm:

c. Cost of equity of the firm:

d. After tax cost of debt of the firm:

e. WACC for the firm:

Answer 1

Value of equity of the firm=  30.20 million shares * $45.42 per share

= $ 1371.684 Million

Value of Debt = 419,000.00 bonds * $1,051.00

= $ 440,369,000

= $ 440.369 Million

Total Value = Value of equity + Value of Debt

= $ 1371.684 Million + $ 440.369 Million

= $ 1,812.053 Million

a. Weight of equity of the firm = Value of Equity / Total Value

= $ 1371.684 Million / $ 1,812.053 Million

= 75.70%

Answer =  75.70%

b. Weight of debt of the firm = Value of Debt / Total Value

= $ 440.369 Million / $ 1,812.053 Million

= 24.30%

Answer =  24.30%

c. Cost of Equity = Risk free rate + (Expected market return - risk free rate)* beta

= 4%+(12.52%-4%)* 0.986

= 12.40072%

Answer = 12.40072%

d. After tax cost of debt of the firm = Cost of Debt * ( 1- Tax Rate)

= 6.52%*(1-39%)

= 3.9772%

Answer = 3.9772%

e. WACC for the firm = (Cost of Debt * Weight of Debt) + (Cost of Equity * Weight of Equity)

= 10.35%

Answer = 10.35%

Note:

	Value	Weight(value / total)	Cost	Weight * cost
Equity	1,371.68	75.69778588153880	12.40072 %	9.39 %
Debt	440.37	24.30221411846120	3.97720 %	0.97 %
	1,812.05			10.35 %