Jake\'s Sound Systems has 210,000 shares of common stock outstanding at a market

Question

Jake's Sound Systems has 210,000 shares of common stock outstanding at a market price of $36 a share. Last month, Jake's paid an annual dividend in the amount of $1.593 per share. The dividend growth rate is 4%. Jake's also has 6,000 bonds outstanding with a face value of $1,000 per bond. The bonds carry a 7% coupon, pay interest annually, and mature in 4.89 years. The bonds are selling at 99% of face value. The company's tax rate is 34%. What is Jake's weighted average cost of capital?

Jake's Sound Systems has 210,000 shares of common stock outstanding at a market price of $36 a share. Last month, Jake's paid an annual dividend in the amount of $1.593 per share. The dividend growth rate is 4%. Jake's also has 6,000 bonds outstanding with a face value of $1,000 per bond. The bonds carry a 7% coupon, pay interest annually, and mature in 4.89 years. The bonds are selling at 99% of face value. The company's tax rate is 34%. What is Jake's weighted average cost of capital?

Explanation / Answer

E = 210,000*36 = 7.56m

D1 = $1.593 x 1.04 = $1.65672

To get re

36 = 1.65672 / re - g

re = (1.65672 / 36) + g

= 0.08602 = 8.602%

D = 6,000*1,000*0.99 = 5.9

To get rd

N = 4.89, I/Y = ???, PV=990 {0.99*1,000}, PMT=70 {007*1,000), FV=1,000

YTM = 7.1541%

V= 7.56 + 5.9 =13.46

WACC = (5.9/13.46)*(0.071541)*(1-0.34) + (7.56/13.46)*0.086

WACC = 0.069 = 6.9%

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