Question

Discovery Manufacturing, Inc. has 2,550,000 shares of common stock outstanding. The current share price is $115.67, and the book value per share is $13.73. Discovery also has two bond issues outstanding. The first bond issue has a face value (or book value) of $5,640,900 and a coupon rate of 6.25% and sells for 104.1% of PAR value. The second issue has a face value (or book value) of $6,464,100 and a coupon rate of 7.60% and sells for 92.2% of PAR value. The 6.25% coupon bond matures in 21 years, the 7.60% coupon bond matures in 9 years. Both bonds make semiannual payments. The tax rate is 31.5%.

Suppose Discovery’s stock has a beta of 1.14. The 10-year Treasury Note rate is 3.14%, and the market risk premium is 11.14%. Assume that the overall cost of debt is the weighted average implied by the two outstanding debt issues.

What is Discovery’s Weighted Average Cost of Capital (WACC)?

DATA INPUT
					6.25% Coupon Bond	7.60% Coupon Bond
Face Value (or book value)					$5,640,900	$6,464,100
Coupon rate					6.25%	7.60%
Bond price (% of PAR)					104.1%	92.2%
Term to maturity (years)					21	9
Tax rate					31.50%	31.50%
					Common Stock
# Shares outstanding					2,550,000
Market value per share					$115.67
Beta					1.14
10-year Treasury Note Rate (rRF)					3.14%
Market risk premium (rPM)					11.14%

Required figures in yellow

			After-Tax COST	Current Market Values ($)	Market Value WEIGHT (%)	Weighted Cost
6.25% Coupon Bond			0.000%	$0	0.000%	0.00000%
7.60% Coupon Bond			0.000%	$0	0.000%	0.0000%
Common Stock			0.000%	$0	0.000%	0.0000%
TOTALS				$0	0.000%
					WACC =	0.000%

Answer 1

DATA INPUT
					6.25% Coupon Bond	7.60% Coupon Bond
Face Value (or book value)					$5,640,900	$6,464,100
Coupon rate					6.25%	7.60%
Bond price (% of PAR)					104.10%	92.20%
					$            5,872,177	$   5,959,900
Term to maturity (years)					21	9
Tax rate					31.50%	31.50%
Cost of Bonds
Interest (1 - Tax Rate)					241,501	336,521
Cost of Bonds (Interest / Face Value of Bonds)					4.28%	5.21%
					Common Stock
# Shares outstanding					2,550,000
Market value per share					$115.67
Total Market Value (Market Value per Share x # Shares outstanding					$294,958,500
Beta					1.14
10-year Treasury Note Rate (rRF)					3.14%
Market risk premium (rPM)					11.14%
Cost of Equity Rf + Beta(Rm - Rf)					12.26%
Required figures in yellow
			After-Tax	Current Market Values ($)	Market Value WEIGHT (%) (Current Market Value / Total All Securities' Market Values)	Weighted Cost (Market Value Weight x After Tax Cost)
			COST
6.25% Coupon Bond			4.28%	$5,872,177	1.91%	0.08%
7.60% Coupon Bond			5.21%	$5,959,900	1.94%	0.10%
Common Stock			12.26%	$294,958,500	96.14%	11.79%
TOTALS				$0	0.00%
					WACC =	11.97%