Question

Q1) Suppose a firm has 16.70 million shares of common stock outstanding at a price of $23.23 per share. The firm also has 257000.00 bonds outstanding with a current price of $1,013.00. The outstanding bonds have yield to maturity 9.76%. The firm's common stock beta is 1.227 and the corporate tax rate is 35.00%. The expected market return is 9.87% and the T-bill rate is 5.53%. 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 =  16.70 million shares * $23.23 per share

= $ 387.941 Million

Value of Debt = 257000.00 bonds outstanding *  $1,013.00

= $ 260.341 Million

Total Value = Value of Equity+Value of Debt

= $ 648.282 Million

a. Weight of Equity = Value of Equity / Total Value

= $ 387.941 Million/$ 648.282 Million

= 59.84139618252550 %

Answer = 59.84%

b. Weight of Debt = Value of Debt / Total Value

= $ 260.341 Million / $ 648.282 Million

= 40.15860381747450 %

Answer = 40.16%

c. Cost of Equity of the firm= risk free rate+(expected return on market -risk free rate)*beta

= 5.53%+(9.87%-5.53%)*1.227

= 10.85518 %

Answer = 10.86%

d. Cost of Debt = yield to maturity*(1-tax rate)

= 9.76%*(1-35%)

= 6.344%

Answer = 6.34%

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

= 9.04%

Answer = 9.04%

Note:

	Value	Weight(value / total)	Cost	Weight * cost
Equity	387.9410	59.84139618252550	10.85518	6.50 %
Debt	260.3410	40.15860381747450	6.344	2.55 %
	648.2820			9.04 %