Question

3.   Calculate the WACC for the following situation.   Show your calculations in detail.

Borrow 10 million Bank Loan Monthly payments 8% annual rate.

Issue 15 million in Common Stock   Earnings per share 45 cents   Price per share 26.00 dollars

Issue 10 million in Preferred Stock   Dividend per share 10 dollars Price per share 220 dollars Cost of selling each preferred share 3 dollars

Use 12 million in Retained Earnings

Income tax rate    35%

Answer 1

WACC= Cost of equity * % Equity + Cost of Debt * % Debt * (1 - Tax Rate) + Cost of preferred stock * %Preferred Stock

Particulars	Amount	Weights	Return	Cost
Debt	10000000	0.212766	800000	0.08
Equity	27000000	0.574468	12150000	0.45
Preferred stock	10000000	0.212766	590909.0909	0.059091
Total	47000000

WACC = 0.45 * 0.574468 + 0.08 * 0.212766 * (1 - 0.35) + 0.059091 * 0.212766

WACC = 0.2585106 + 0.01702128 (1 - 0.35) + 0.012573

WACC = 0.2585106 + 0.011064 + 0.012573

WACC = 0.2821476

* Retained earnings are reinvested back into the organization. Retained earnings are included in the WACC equation as equity, as dividends are a component of the return on capital to equity stakeholders, and thus will have a correspondingly weighted influence on the cost of equity.

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