Question

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

• Debt: 17,958 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 $56.02 per share. The stock has a beta of 1.49.
• Preferred Stock: 10,000 shares of preferred stock with a dividend of $5.20 per share. It is currently selling at $106.37 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

Answer :

Calculation of WACC

WACC = (Cost of Equity * Weight of Equity) + (Cost of Preferred Stock * Weight of Preferred Stock ) + (Cost of after tax debt * Weight of Debt)

Cost of Equity = Risk free rate + (Beta * Market Premium)

= 2.5% +( 1.49 * 7.5%)

= 2.5% + 11.175%

= 13.675%

Cost of Preferred Stock = Annual Dividend / Current Price

= 5.20 / 106.37

= 0.04888596408 or 4.888596408%

Cost of Debt :

Using Financial Calculator

=RATE(nper,pmt,pv,fv)

where nper is Number of years i.e 20 * 2 = 40 (As coupons are paid semiannually)

pmt is Interest payment i.e 100 * 5% =5

pv is Current Market Price

= - 105

Note : pv should be taken as negative.

fv is face value i.e 100

=RATE(40,5,-105,100)

therefore ,Before tax cost of Debt is 4.719707% (Semi annual)

Before tax cost of Debt is 4.719707% * 2 = 9.439415% (Annual)

After tax cost of Debt = 9.439415% * (1 - Tax rate )

= 9.439415% * (1 - 0.35)

= 6.135620%

Calculation of

Market Value of Equity = 350000 shares * 56.02

= 19,607,000

Market Value of Preferred Stock = 10000 shares * 106.37

= 1,063,700

Market Value of Debt = 17958 * 105

= 1,885,590

Total Market Value = 19,607,000 + 1,063,700 + 1,885,590

= 22,556,290

Weight of Equity = 19,607,000 / 22,556,290

= 0.86924755799 or 0.8692

Weight of Preferred Stock = 1,063,700 / 22,556,290

= 0.04715757777 or 0.0472

Market Value of Debt  = 1,885,590 / 22,556,290

= 0.08359486422 or 0.0836

WACC = (Cost of Equity * Weight of Equity) + (Cost of Preferred Stock * Weight of Preferred Stock ) + (Cost of after tax debt * Weight of Debt)

= (13.675% * 0.8692) + (4.888596408% * 0.0472) + (6.135620% * 0.0836)

= 11.88631% + 0.23074175045% + 0.512937832%

=12.63% or 0.1263