You have been asked to calculate the WACC of a company that you firm is trying t

ID: 2722988 • Letter: Y

Question

You have been asked to calculate the WACC of a company that you firm is trying to value. The firm has the following element of capital:

1. Short Term Debt

Market Value = $30 million; Return = 4.50%

2. Long Term Debt

Par (Face Value) = $450 million; Coupon rate = 6.00%; Maturity 10 years: Current yield to maturity is 6.20%

3. Common Equity

a. Class A shares (publically Traded)

30 million share outstanding; beta = 1.20; Latest Price = $22.40

b. Class B Shares (Not publically Traded)

10 million Share Outstanding; Estimated Beta = 1.40; Last Dividend Paid: $2.00 per share; Expected growth rate in dividends = 5%

4. Preferred Stock

2 million shares outstanding; Market Price = 100; Dividend Share = $5.00

Note: Do not use Floatation Cost i.e. Flotation cost = 0; Risk free rate = 2.00% and expected return on the market is 6.00%.

The firm’s tax rate is 40%

WACC comprises of cost of long term debt, equity & preferred stock

Cost of debt = 6% (1-40) = 3.6%

Cost of equity:

Class A = 2% + 1.2*6% = 9.2%

Class B = 2% + 1.4*6% = 10.4%

Cost of preferred share = Dividend/ Market Price * 100 = 5/100 * 100 = 5%

Market Value of Debt = C * [1-1/(1+i)^n] / i + M/(1+i)^n

C = Coupon payment = $450000000 * 6% = 27000000

M = maturity value = $450000000

i = market rate = 6.20%

n = number of years to maturity = 10 years

Market Value of Debt = 27000000 * [1-1/(1+.062)^10] / .062 + 450000000/(1+.062)^10

= $196852845.68 + $246585392.79 = $443438238.48

Market Value of Class A Stock = 30000000 * 22.40 = 672000000

Market Value of Class B Stock = D/r-g * number of share = 2/ .104 - .05 * 10000000 = 370370370.37

Market Value of preferred stock = 2000000 * 100 = 200000000

Total Market Value = 1685808608.85

WACC = 3.6%*443438238.48/1685808608.85 + 9.2%*672000000/1685808608.85 + 10.4%*370370370.37/1685808608.85 + 5%*200000000/1685808608.85

WACC = 7.49%

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