Jon Snow Inc. recently hired you as a consultant to estimate the company\'s WACC
ID: 1174851 • Letter: J
Question
Jon Snow Inc. recently hired you as a consultant to estimate the company's WACC (Because Jon Snow knows nothing!). You have obtained the following information. (1) The firm's noncallable bonds mature in 20 years, have an 8.00% annual coupon, a par value of $1,000, and a market price of $1,050.00. (2) The company's tax rate is 40%. (3) The company just paid a dividend of $10 (i.e., $D_0=$10$), which is expected to grow at a rate of $6.1%$ for ever, and its stock price is $212.20. (4) The target capital structure consists of 35% debt and 65% common equity. What is the company's WACC?
a. 7.16%
b. 7.54%
c. 7.93%
d. 8.35%
e. 8.79%
a. 7.16%
b. 7.54%
c. 7.93%
d. 8.35%
e. 8.79%
Explanation / Answer
To find the Kd, the following values needed to be put in the financial calculator:
After-Tax Kd = YTM(1 - t)
= 7.51%(1 - 0.4) = 4.51%
Ke = [D0(1 + g) / P0] + g
= [$10(1.061) / $212.2] + 0.061
= 0.05 + 0.061 = 0.111, or 11.1%
WACC = [Wd x After-Tax Kd] + [We x Ke]
= [0.35 x 4.51%] + [0.65 x 11.1%]
= 1.58% + 7.215% = 8.79%
Hence, Option "E" is correct.
Input 20 -$1,050 $80 $1,000 TVM N I/Y PV PMT FV Output 7.51%Related Questions
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