Question

Q) Suppose a firm has 40.80 million shares of common stock outstanding at a price of $45.56 per share.  The firm also has 151000.00 bonds outstanding with a current price of $1,106.00. The outstanding bonds have yield to maturity 7.18%. The firm's common stock beta is 2.267 and the corporate tax rate is 36.00%. The expected market return is 12.79% and the T-bill rate is 3.05%. 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 =  40.80 million shares * $ 45.56 per share

= 1,858.8480

Value of Debt = 151000.00 bonds * $1,106.00

= 167.0060

Total Value = Value of Equity + Value of Debt

= $ 2025.854

a) Weight of Equity of the firm = Value of Equity / Total value

= 1,858.8480 / 2025.854

= 91.75626673985390 %

Answer = 91.76%

b) Weight of Debt of the firm = Value of Debt/ Total value

= 167.0060 / 2025.854

= 8.243733260146090 %

Answer = 8.24%

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

= 3.05%+(12.79%-3.05%)* 2.267

=25.13058 %

Answer = 25.13%

d) After Tax Cost of Debt of the firm = yield to maturity * (1- tax rate)

= 7.18%*(1-36%)

= 4.5952%

Answer = 4.60%

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

= 23.44%

Answer = 23.44%

Note:

	Value	Weight(value / total)	Cost	Weight * cost
Equity	1,858.8480	91.75626673985390	25.13058	23.06
Debt	167.0060	8.243733260146090	4.5952	0.38
	2,025.8540			23.44