In: Finance
Caspian Sea Drinks' is financed with 70.00% equity and the remainder in debt. They have 12.00-year, semi-annual pay, 5.27% coupon bonds which sell for 98.50% of par. Their stock currently has a market value of $24.14 and Mr. Bensen believes the market estimates that dividends will grow at 3.26% forever. Next year’s dividend is projected to be $2.29. Assuming a marginal tax rate of 29.00%, what is their WACC (weighted average cost of capital)?
Weight of equity = 1-D/A |
Weight of equity = 1-0.3 |
W(E)=0.7 |
Weight of debt = D/A |
Weight of debt = 0.3 |
W(D)=0.3 |
Cost of equity |
As per DDM |
Price = Dividend in 1 year/(cost of equity - growth rate) |
24.14 = 2.29/ (Cost of equity - 0.0326) |
Cost of equity% = 12.75 |
Cost of debt |
K = Nx2 |
Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k] + Par value/(1 + YTM/2)^Nx2 |
k=1 |
K =12x2 |
985 =∑ [(5.27*1000/200)/(1 + YTM/200)^k] + 1000/(1 + YTM/200)^12x2 |
k=1 |
YTM = 5.4418596104 |
After tax cost of debt = cost of debt*(1-tax rate) |
After tax cost of debt = 5.4418596104*(1-0.29) |
= 3.863720323384 |
WACC=after tax cost of debt*W(D)+cost of equity*W(E) |
WACC=3.86*0.3+12.75*0.7 |
WACC =10.08% |