Question

1. Full House Co. has the following information:

-Beta=1.2, Market Risk Premium= 7%, Risk free rate = 3%

-A current price of common stock of $60/share, with 100,000 shares outstanding

-A preferred dividend of $10 with a current price of preferred stock of $100, and 10,000 shares outstanding

-5000 outstanding bonds with 20 years to maturity, paying a 5% coupon, and a current price of $1150 and 6000 outstanding bonds with 10 years to maturity, paying a 4%, and a current price of $1041.67

-Full House’s Tax Rate is 21%

Find the WACC for Full House Inc.

**please post STEP BY STEP instructions

Answer 1

A)	COMPONENT COST OF CAPITAL:
1)	Cost of common stock per CAPM = risk free rate+beta*market risk premium = 3%+1.2*7% =	11.40%
2)	Cost of preferred stock = Dividend/Price = 10/100 =	10.00%
3)	Cost of debt:
a)	1st Bond:
	Before tax cost of debt = YTM.
	YTM using a calculator = 3.91%
	After tax cost of debt = 3.91%*(1-21%) =	3.09%
b)	2nd Bond:
	Before tax cost of debt = YTM.
	YTM using a calculator = 3.50%
	After tax cost of debt = 3.50%*(1-21%) =	2.77%
B)	WACC:
	Component	Market Value	Weight	Component Cost	WACC
	Common stock [100000*$60]	$6000000	31.58%	11.40%	3.60%
	Preferred stock [10000*$100]	$1000000	5.26%	10.00%	0.53%
	Debt:
	1st Bond [5000*1150]	$5750000	30.26%	3.09%	0.93%
	2nd Bond [6000*1041.67]	$6250020	32.89%	2.77%	0.91%
	Total	$19000020	100.00%		5.97%
	WACC = 5.97%