Question

Suppose a firm has 19.90 million shares of common stock outstanding at a price of $27.51 per share.  The firm also has 198000.00 bonds outstanding with a current price of $1,015.00. The outstanding bonds have a yield to maturity of 9.02%. The firm's common stock beta is 1.41 and the corporate tax rate is 39.00%. The expected market return is 14.57% and the T-bill rate is 2.93%. Compute the following:

-Weight of Equity of the firm

-Weight of Debt of the firm

-Cost of Equity of the firm

-After-Tax Cost of Debt of the firm

-WACC for the Firm

Please show work and Thank you

Answer 1

Calculation of Weight of Equity and Debt of the firm :

Market Value of Equity = Number of Equity shares * Price per share

= 19,900,000 * 27.51

= 547,449,000

Market Value of Debt = Number of Bond Outstanding * Price per Bond

= 198,000 * 1015

= 200,970,000

Total Market Value = 547,449,000 + 200,970,000

= 748,419,000

Weight of Equity = Market Value of Equity / Total Market Value

= 547,449,000 / 748,419,000

= 0.73147394708 or 0.7315

Weight of Debt = Market Value of Debt / Total Market Value

= 200,970,000 / 748,419,000

= 0.26852605291 or 0.2685

Calculation of Cost of Equity and After-Tax Cost of Debt of the firm

Cost of Equity = Risk free rate + Beta * ( Expected market return - Risk free return)

= 2.93% + 1.41 * (14.57% - 2.93%)

= 2.93% + 16.4124%

= 19.3424%

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

= 9.02% * (1 - 0.39)

= 5.5022%

Calculation of WACC of the Firm

WACC = (Cost of After tax Debt * Weight of Debt) + ( Cost of Equity * Weight of Equity)

= (5.5022% * 0.2685) + (19.3424% * 0.7315)

= 1.4773407% + 14.1489656%

= 15.6263063% or 15.63%