Question

Ten Pins Manufacturing has 8.2 million shares of common stock outstanding. The current share price is $52, and the book value per share is $3. The company also has two bond issues outstanding. The first bond issue has a face value of $69.8 million and a coupon rate of 6.9 percent and sells for 108.4 percent of par. The second issue has a face value of $59.8 million and a coupon rate of 7.4 percent and sells for 108.7 percent of par. The first issue matures in 7 years, the second in 28 years.

The company’s stock has a beta of 1.1. The risk-free rate is 3 percent, and the market risk premium is 6.9 percent. Assume that the overall cost of debt is the weighted average implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 34 percent. What is the company’s WACC?

Answer 1

1]	Overall cost of debt:
	Cost of first bond:
	Before tax cost of debt = YTM.
	YTM using a financial calculator = 5.44%
	After tax cost of first bond = 5.44%*(1-34%) =	3.59%
	Cost of second bond:
	YTM using a financial calculator = 6.71%
	After tax cost of second bond = 6.71%*(1-34%) =	4.43%
	Weighted average cost of debt:
		Market Value [$ millions]	Weight of debt	Cost of debt	Weighted average cost
	First bond [69.8*108.4%]	$         75.6632	53.79%	3.59%	1.93%
	Second bond [59.8*108.7%]	$         65.0026	46.21%	4.43%	2.05%
	Total	$      140.6658	100.00%		3.98%
	Weighted average cost of debt	3.98%
2]	Cost of equity per CAPM = risk free rate+beta*market risk premium = 3%+1.1*6.9% =	10.59%
3]	CALCULATION OF WACC:
	Source of capital	Market Value [$ millions]	Weight	Component cost	WACC
	Debt	$      140.6658	24.81%	3.98%	0.99%
	Equity [8.2*52]	$      426.4000	75.19%	10.59%	7.96%
	Total	$      567.0658	100.00%		8.95%
	WACC =	8.95%