Question

Q) Suppose a firm has 16.70 million shares of common stock outstanding at a price of $16.68 per share. The firm also has 167000.00 bonds outstanding with a current price of $1,016.00. The outstanding bonds have yield to maturity 7.19%. The firm's common stock beta is 1.97 and the corporate tax rate is 38.00%. The expected market return is 11.54% and the T-bill rate is 2.96%. 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

Answer 1

Value of Equity = Number of Shares * Market Price

=  16.70 million shares*  $16.68 per share

= $ 278.556 Million

Value of Debt =  bonds outstanding * Current Price

=  167000 * $ 1016

= $ 169,672,000

= $ 169.672 million

Total Value = Value of Equity+ Value of Debt

= $ 278.556 Million + $ 169.672 million

= $ 448.228 Million

Weight of Equity of the firm = Value of Equity / Total Value

= $ 278.556 Million / $ 448.228 Million

= 62.14605067%

= 62.15%

Weight of Debt of the firm = Value of Debt/ Total Value

= $ 169.672 million / $ 448.228 Million

= 37.8539 %

= 37.85%

Cost of Equity of the firm =Risk Free rate + (Market Return - Risk Free Rate ) * Beta

= 2.96%+(11.54%-2.96%)*1.97

= 19.8626%

= 19.86%

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

= 7.19%*(1-38%)

=4.4578%

= 4.46%

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

=(4.4578%*37.8539%)+(19.8626%*62.14605067%)

= 14.03%

Note: The answers are rounded off to two decimal places.