Question

Caspian Sea Drinks' is financed with 60.00% equity and the remainder in debt. They have 11.00-year, semi-annual pay, 5.47% coupon bonds which sell for 97.80% of par. Their stock currently has a market value of $24.31 and Mr. Bensen believes the market estimates that dividends will grow at 3.90% forever. Next year’s dividend is projected to be $2.09. Assuming a marginal tax rate of 20.00%, what is their WACC (weighted average cost of capital)?

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -

M23 A B C D E Tax rate 20% $1,000 5.47% Par value of Bond (Assumed) Coupon rate Coupon frequency Years until maturity Price of Bond Yield to maturity (cost of debt) Aftertax cost of debt 2 11 $978 6.35% 5.08% Market Price of Share Next Dividend Dividend growth rate Cost of Equity $24.31 $2.09 3.90% 12.50% Capital Weight Cost 60% Debt Equity 5.08% 12.50% 40% WACC 8.05%

Tax rate 0.2 1000 0.0547 6 Par value of Bond (Assumed) Coupon rate Coupon frequency Years until maturity Price of Bond Yield to maturity (cost of debt) Aftertax cost of debt 8 9 =C4*97.8% =RATE(C7/2,-C5/2* C4,C8,-C4,0)*2 =C9*(1-C2) 10 11 12 13 14 24.31 2.09 Market Price of Share Next Dividend Dividend growth rate Cost of Equity 0.039 =(C13/c12)+C14 15 16 Capital Weight Cost =C10 Debt Equity =1-C18 =C15 WACC =SUMPRODUCT(C18:C19,D18:019)