Tapley Inc. recently hired you as a consultant to estimate thecompany’s WACC. Yo
ID: 2661476 • Letter: T
Question
Tapley Inc. recently hired you as a consultant to estimate thecompany’s WACC. You have obtained the followinginformation. (1) Tapley's bonds mature in 25 years,have a 7.5% annual coupon, a par value of $1,000, and a marketprice of $936.49. (2) The company’s tax rate is 40%.(3) The risk-free rate is 6.0%, the market risk premium is 5.0%,and the stock’s beta is 1.5. (4) The targetcapital structure consists of 30% debt and 70% equity. Tapleyuses the CAPM to estimate the cost of equity, and it does notexpect to have to issue any new common stock. What is itsWACC?
9.89%
10.01%
10.35%
10.64%
10.91%
Explanation / Answer
Calculating Required Rate ofReturn on Stock (RE): RE = Rf + ß (MRP) RE = 6% + 1.5 *5% RE = 0.06 + 1.5* 0.05 Required Rate of Return (RE) = 0.135 (or)13.5% Calculating Cost of Debt (RD): Calculating YTM on Bond: (Using Ms-Excel "RATE"Function): Number of Periods 25 Annual Coupon Payment ($1,000 * 7.5%) $75 Present Value of the Bond (PV) -$936.49 Future Value of the Bond (FV) $1,000 Bond Yield (or) YTM of theBond 8.10% WACC = (E/V)RE +(D/V) RD (1-0.40) WACC = 0.70 * 0.135 +0.30 * 0.081 * 0.60 WACC = 0.0945 +0.01458 WACC = 0.10908 WACC = 10.91% Calculating Required Rate ofReturn on Stock (RE): RE = Rf + ß (MRP) RE = 6% + 1.5 *5% RE = 0.06 + 1.5* 0.05 Required Rate of Return (RE) = 0.135 (or)13.5% Calculating Cost of Debt (RD): Calculating YTM on Bond: (Using Ms-Excel "RATE"Function): Number of Periods 25 Annual Coupon Payment ($1,000 * 7.5%) $75 Present Value of the Bond (PV) -$936.49 Future Value of the Bond (FV) $1,000 Bond Yield (or) YTM of theBond 8.10% WACC = (E/V)RE +(D/V) RD (1-0.40) WACC = 0.70 * 0.135 +0.30 * 0.081 * 0.60 WACC = 0.0945 +0.01458 WACC = 0.10908 WACC = 10.91%Related Questions
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