Based on the information below, calculate the weighted average cost of capital.

Question

Based on the information below, calculate the weighted average cost of capital.

Great Corporation has the following capital situation.

Debt: One thousand bonds were issued five years ago at a coupon rate of 10%. They had 25-year terms and $1,000 face values. They are now selling to yield 9%. The tax rate is 40%

Preferred stock: Two thousand shares of preferred are outstanding, each of which pays an annual dividend of $7.50. They originally sold to yield 15% of their $50 face value. They're now selling to yield 10%.

Equity: Great Corp has 120,000 shares of common stock outstanding, currently selling at $14.48 per share. The risk free rate is 3%, market rate of return is 10% and the Beta is 1.2.

Please show work!

Explanation / Answer

Hi,

Please find the answer as follows:

Current Price of Bond = =PV(9%,20,100,1000) = 1091.29

Market Value of 1000 Bonds = 1000*1091.29 = 1091290

Current Price of Preferred Stock = Dividend/Require Return or Yield = 7.5/.10 = 75

Market Value of Preferred Stock = 2000*75 = 150000

Cost of Equity = Rf + B*(Rm - Rf) = 3 + 1.2*(10-3) = 11.4%

Market Value of Equity = 120000*14.48 = 1737600

WACC = 9*(1-.40)*1091290/(1091290 + 150000 + 1737600) + 10*150000/(1091290 + 150000 + 1737600) + 11.4*1737600/(1091290 + 150000 + 1737600) = 9.13%

Thanks.

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