Question

You are given the following information concerning Baron Co. Calculate the WACC for Baron Co.

• Debt: 11,162 5% coupon bonds outstanding, quoted at 105, with 20 years to maturity. These bonds pay interest semiannually.
• Common Stock: 350,000 shares common stock selling for $52.86 per share. The stock has a beta of 1.39.
• Preferred Stock: 10,000 shares of preferred stock with a dividend of $5.20 per share. It is currently selling at $108.09 per share.
• Market: The market premium is 7.5%, and the risk-free rate of return is 2.5%.
• tax bracket = 35%

Baron's WACC =________% (Round your answer to two decimal places in percentage. For example, if your answer is 0.0547, input your answer as 5.47.)

Answer 1

value of debt = 11162 * 105% * 1000

= 11720100

value of equity = 350000 * 52.86

= 18501000

value of preferred stock = 10000 * 108.09

= 1080900

total value = 1080900 + 18501000 + 11720100

= 31302000

using excel rate function

before tax cost of debt = RATE(number_of_periods, payment_per_period, present_value, [future_value], [end_or_beginning], [rate_guess]) * number of compounds

= RATE(20*2,50/2,-1050,1000) * 2

= 4.6145%

after tax cost of debt = 4.6145% * (1-0.35)

= 2.999425%

Expected return = risk free rate + beta * market risk premium

cost of equity = 2.5% + 1.39 * 7.5%

= 12.925%

cost of preferred stock = dividend/price

= 5.2/108.09

= 0.04810805809

WACC = weight of debt * after-tax cost of debt + weight of equity * cost of equity + weight of preferred stock * cost of preferred stock

= (11720100/31302000) * 2.999425% + (18501000/31302000) * 12.925% + (1080900/31302000) * 4.810805809%

= 8.93%