a company needs 1 billion financing for development. estimate the cost of capita

Question

a company needs 1 billion financing for development. estimate the cost of capital. 20 years bonds mature in 10 years. currently a coupon rate of 8%, paid semi annually. the price of bonds today is 1200$ with 2500 bonds on the market. new common shares can be issued for 30$ with a cost of $2. dividends paid out this year for 1.80$. the growth rate is estimated at 7%. there are 300 000 common shares on market today. corporate tax is 30%. what is the WACC and show your work. calculate without using excel.

Explanation / Answer

Using financial calculator BA II Plus - Input details:

#

FV = Future Value =

-$1,000.00

PV = Present Value =

$1,200.00

N = Total number of periods = Number of years x frequency =

20

PMT = Payment = Coupon / frequency =

-$40.00

CPT > I/Y = Rate per period or YTM per period =

                             2.693

Convert Yield in annual and percentage form = Yield*frequency / 100 =

5.39%

After tax Cost of debt = YTM x (1-Tax) = Yeild x (1-30%) =

3.77%

Equity cost using DDM

#

Existing growth rate = g =

7.00%

Expected dividend = D1 = D0*(1+g) = 1.80 x (1+7%)

1.926

Expected rate = r =

?

Current stock price = P0 =

30.00

Flotation cost = f =

2.00

Formula for calculating the Expected rate:

r = (D1/(P0-f))+g = (1.926/(30-2))+7% =

13.88%

Weights ; Market weight = Market value / Total of Market value

Particulars

Price

Quantity

Price x Quantity

Market weights

Debt

$1,200.00

                     2,500

       3,000,000.00

                         0.250000

Equity

$30.00

                300,000

       9,000,000.00

                         0.750000

Total

     12,000,000.00

.Equity weight = 9m/12m = 75% ; Debtweight = 25%

.

WACC = Cost of equity x Weight of equity + Cost of debt x Weight of debt

WACC = 13.88% x 0.75 + 3.77% x 0.25

WACC = 11.35%

Using financial calculator BA II Plus - Input details:

#

FV = Future Value =

-$1,000.00

PV = Present Value =

$1,200.00

N = Total number of periods = Number of years x frequency =

20

PMT = Payment = Coupon / frequency =

-$40.00

CPT > I/Y = Rate per period or YTM per period =

                             2.693

Convert Yield in annual and percentage form = Yield*frequency / 100 =

5.39%

After tax Cost of debt = YTM x (1-Tax) = Yeild x (1-30%) =

3.77%

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