a. Find WACC given: (show all steps please) Debt: 10,000 6% coupon bonds outstan

ID: 2719940 • Letter: A

Question

a. Find WACC given: (show all steps please)

Debt: 10,000 6% coupon bonds outstanding, $1,000 par value, 10 years to maturity, selling at par, quarterly payment.

Comment stock: 500,000 shares outstanding, selling for $25 per share, the beta is 1.2.

Preferred stock: 15,000 shares of 5 percent preferred stock outstanding, currently selling for $93 per share.

Market: 8 percent market risk premium and 4.5 percent risk-free rate.

b. Now adjusts the cost of debt to 6% and its debt-to-equity ratio to 1.5 times. What will be the cost of equity? (There is no tax)

Maket value of Debt=10000*1000= $1,000,000

Market value of common stock==500000*25= $12,500,000

Market value of Prefered stock=15000*93=$1,395,000

Total value=14,895,000

Weightage of debt= 1000000/14895000=0.0671

Weightage of common stock=12500000/14895000=0.8392

Weightage of Prefered stock=1395000/14895000=0.0937

Cost of debt=6%

cost of common stock using CAPM model= 4.5%+1.2*(8%-4.5%)=8.7%

Cost of prefered stock=5%

WACC=(6%*0.0671)+(8.7%*0.8392)+(5%*0.0937)=8.17%

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