Question

****PLEASE SHOW IN EXCEL****

2. Western Trans Corporation has 7,500 bonds outstanding with a face value of $1,000 per bond. The bonds carry a 7 percent coupon, pay interest semiannually, and mature in 7.5 years? The bonds are selling at 98 percent of face value. The firm also has 250,000 shares of common stock outstanding at a market price of $28 a share. Next year's annual dividend is expected to be $1.55 a share. The dividend growth rate is 2 percent. The company's tax rate is 34 percent. What is the firm's weighted average cost of capital? Show all your work.

A. 4.57%

B. 5.44%

C. 6.16%

D. 7.11%

E. 8.99%

Answer 1

Par/Face value	1000
Annual Coupon rate	0.07
Annual coupon	70
semi-annual coupon	35
Present Value = Future value/[(1+(r/m))^mt]
r is the interest rate.
m is the compounding period that is 2
mt is the time period.
price of the bond = sum of present values of future cash flows
price of each bond	.98*1000
price of each bond	980
Use excel to find r
r/2	0.0367	r	0.0734
mt	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15
future cash flow	35	35	35	35	35	35	35	35	35	35	35	35	35	35	1035
present value	33.760972	32.56581	31.41295	30.30091	29.22823	28.19353	27.19546	26.23272	25.30406	24.40827	23.5442	22.71072	21.90674	21.13122	602.7592
sum of present values	980.66
The yield to maturity or interest rate on the bonds is equal to 7.34%.
g1	0.02
D1	1.55
According to the dividend growth model.
The price of the stock in year 0
P0 = D1/(R-g1)
P0	28
where R is the interest rate
28 = 1.55/(R-.02)
R - .02 = 1.55/28
R = (1.55/28) + .02
R = .055357 + .02
R = .075357
The interest rate for the stock is 7.54%.
Weighted average cost of capital (WACC) = [(S/S+B)*Rs + (B/S+B)*Rb(1-tc)]
	S = equity, B = debt, Rs = Cost of equity, Rb = cost of debt,
	tc = corporations tax rate
S	250000*28
S	7000000
B	7500*980
B	7350000
Rs	0.0754
Rb	0.0734
tc	0.34
WACC	.488*.0754 + .512*.0734*(1-.34)
WACC	.488*.0754 + .512*.0734*(.66)
WACC	0.0615985
The WACC is
C) 6.16%