1. The total book value of WTC’s equity is $50 million and book value per share
ID: 2721801 • Letter: 1
Question
1. The total book value of WTC’s equity is $50 million and book value per share outstanding is $10. The stock of WTC is currently selling for a price of $75 per share and the beta of WTC is 1.15. The bonds of WTC have a face value of $62 million and sell at a price of 110 percent of face value. The yield to maturity on the bonds is 5.5 percent and the firm’s tax rate is 35 percent. If the E(Rm) = 8% and Rf = 1%, calculate the WACC of WTC.
Suppose the company in #1 is considering the following expansion projects. How would you calculate the required rate of return to use in the NPV analysis of the following: Explain. (a) The company is considering an expansion to double the production of its current product. The company will issue either equity or debt (but not both) to pay for the expansion. (b) The company is considering adding a new product in a different line of business that is unrelated to their current product.
Explanation / Answer
WTC Capital details Details Amt $/Nos Book Value of Equity 50,000,000 Book Value per common stock 10 No of shares outstanding = 5,000,000 Market price per share 75 Market Value of WTC shares = 375,000,000 Risk free rate =Rf=1% Expected return from Market =Rm=8% Beta of WTC stock =1.15 Required return of WTC stock=Rs= Rf+(Rm-Rf)*beta =1%+7%*1.15 = 9.05% So cost of Equity =9.05% Bond Bond Face value 62,000,000 Bond Market price @110%= 68,200,000 YTM of Bond =5.5% Tax rate =35% Post Tax cost of debt = 5.5%*(1-35%)= 3.58% So Post tax cost of bond =3.58% WACC of WTC Capital Type Value % Wt of value Post Tax cost Weighted Cost Equity 375,000,000 84.61% 9.05% 7.66% Debt 68,200,000 15.39% 3.58% 0.55% Total 443,200,000 8.21% So WACC of WTC is 8.21%
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