Question

In: Finance

Given the following information about your firm’s capital structure, calculate your firm’s WACC (assume the corporate...

Given the following information about your firm’s capital structure, calculate your firm’s WACC (assume the corporate tax rate is 35%). Debt Number of bonds outstanding = 12,000 price per bond = $1,165 par value per bond = $1,000 coupon rate = 6% (paid annually) Years to maturity = 10 Common Stock Number of shares outstanding = 1,000,000 Price per share = $25 Book value per share = $15 Beta = 1.4 Risk free rate = 4.5% Market risk premium = 5%

Solutions

Expert Solution

Market value of debt= $1,165*12,000= $13,980,000.

Market value of equity= $25*1,000,000= $25,000,000

Total firm value= $13,980,000 + $25,000,000 = $38,980,000.

Weight of debt in the capital structure= $13,980,000/ $38,980,000

                                                                           = 0.3586*100

                                                                           = 35.86%

Weight of equity in the capital structure= $25,000,000/ $38,980,000

                                                                             = 0.6414*100

                                                                             = 64.14%

The cost of equity is calculated using the Capital Asset Pricing Model (CAPM) which is calculated using the formula below:

Ke=Rf+[E(Rm)-Rf]

Where:

Rf=risk-free rate of return

Rm=expected rate of return on the market.

Rm- Rf= Market risk premium

= stock’s beta

Ke= 4.5% + 1.4*5%

     = 4.5% + 7%

     = 11.50%

The cost of debt is calculated by computing the yield to maturity.

Par value= future value= $1,000

Current price= market value= $1,165

Coupon rate= 6%

Coupon payment= 0.06*1,000= $60

Time= 10 years

The yield to maturity is calculated by entering the below in a financial calculator:

FV= 1,000

PV= 1,165

PMT= 60

N= 10

Press the CPT key and I/Y to compute the yield to maturity.

The value obtained is 3.9689.

Therefore, the yield to maturity is 3.97%.

WACC= wd*kd(1-t)+we*ke

Where:

Wd=percentage of debt in the capital structure

We=percentage of equity in the capital structure

Kd=cost of debt

Ke=cost of equity

t= tax rate

WACC= 0.3586*3.97*(1- 0.35) + 0.6414*11.50%

            = 0.9254 + 7.3761

            = 8.3015%8.30%.

           


Related Solutions

Given the following information about your firm’s capital structure, calculate your firm’s WACC (assume the corporate...
Given the following information about your firm’s capital structure, calculate your firm’s WACC (assume the corporate tax rate is 35%). Debt Number of bonds outstanding = 12,000 price per bond = $1,165 par value per bond = $1,000 coupon rate = 6% (paid annually) Years to maturity = 10 Common Stock Number of shares outstanding = 1,000,000 Price per share = $25 Book value per share = $15 Beta = 1.4 Risk free rate = 4.5% Market risk premium =...
Using the following information to calculate the firm’s WACC. The firm’s target capital structure is 60%...
Using the following information to calculate the firm’s WACC. The firm’s target capital structure is 60% common stock, 30% debt, and 10% preferred stock. Debt: 7,000 5.0% coupon bonds outstanding, with 11 years to maturity, $1,000 par value and a quoted price of 106.25% of par value. These bonds pay interest semiannually. Common Stock: 300,000 shares of common stock selling for $65.40 per share. The stock has a beta of 1.44. Preferred Stock: 8,500 shares of preferred stock selling at...
Given the following information, calculate the firm’s WACC. Assume the interest on the debt is 100%...
Given the following information, calculate the firm’s WACC. Assume the interest on the debt is 100% tax deductible. Tax rate: 20% Debt rate: 6% Preferred stock dividend rate: 9% of $100 par value Risk-free rate of return: 2% Market rate of return: 12% Stock beta: 1.3 Debt value: $50,000,000 P/S value: $15,000,000 C/S value: $35,000,000 b) What would a firm use the WACC for?
Calculate the WACC for the following company. The company has a capital structure that consists of...
Calculate the WACC for the following company. The company has a capital structure that consists of 50% debt and 50% common stock the company’s CFO has obtained the following information: The yield to maturity on the company’s bonds is 7% The coupon rate on the company’s bonds is 5% The next expected dividend is expected to be $7.00 The dividend is expected to grow at a constant rate of 5% per year The stock price is currently $75 per share...
Suppose you are conducting a marginal WACC analysis to identify your firm’s optimal capital budget. Assume...
Suppose you are conducting a marginal WACC analysis to identify your firm’s optimal capital budget. Assume you have $1,500,000 of retained earnings available. The current market price of the common stock is $45.00. The expected dividend for this coming year is projected to be $2.80, increasing thereafter at a 7% annual growth rate. Sale of new common stock will be subject to a 2% discount from the current stock price, and investment banking fees will be $3.75 per share. Assume...
14. Finding the WACC Given the following information for Lightning Power Co., find the WACC. Assume...
14. Finding the WACC Given the following information for Lightning Power Co., find the WACC. Assume the company’s tax rate is 21 percent. Debt: 16,000 6.2 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 108 percent of par; the bonds make semiannual payments. Common stock: 535,000 shares outstanding, selling for $81 per share; beta is 1.20. Preferred stock: 20,000 shares of 4.2 percent preferred stock outstanding, currently selling for $92 per share. The par value...
He also wants to know the WACC and has given you the following information about your...
He also wants to know the WACC and has given you the following information about your capital budgeting: The 20 year $1000 par value mortgage bonds were sold at $952.67 and pay 8%. They had a $47.67 flotation cost. What is the cost of the mortgage bonds? Answer: The 15 year $500 par value debentures were sold at $486.50 and pay 6%. They had a $26.50 flotation cost. What is the cost of the debentures? Answer: DWOTT paid a dividend...
He also wants to know the WACC and has given you the following information about your...
He also wants to know the WACC and has given you the following information about your capital budgeting: The 20 year $1000 par value mortgage bonds were sold at $952.67 and pay 8%. They had a $47.67 flotation cost. What is the cost of the mortgage bonds? Answer: The 15 year $500 par value debentures were sold at $486.50 and pay 6%. They had a $26.50 flotation cost. What is the cost of the debentures? Answer: DWOTT paid a dividend...
Given the following information, calculate the Present Value Index for a capital budget proposal. Show your...
Given the following information, calculate the Present Value Index for a capital budget proposal. Show your work. Machine Cost: $6,000,000 Salvage Value: $50,000 Setup Costs: $45,000 Training Costs: $25,000 Annual maintenance costs: $45,000 Anticipated annual savings: $560,000 Annual labor savings: $25,000 Expected useful life in years: 12 Overhaul costs in year 4: $50,000 Annual operating costs: $25,000 Hurdle rate: 8%
Given the following information, calculate the Net Present Value for a capital budget proposal? Show your...
Given the following information, calculate the Net Present Value for a capital budget proposal? Show your work. Machine Cost: $6,000,000 Salvage Value: $50,000 Setup Costs: $45,000 Training Costs: $25,000 Annual maintenance costs: $45,000 Anticipated annual savings: $560,000 Annual labor savings: $25,000 Expected useful life in years: 12 Overhaul costs in year 4: $50,000 Annual operating costs: $25,000 Hurdle rate: 8%
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT