Their total debt is 5 million with 10- year maturity, semi-annual bond pricing a
ID: 2725502 • Letter: T
Question
Their total debt is 5 million with 10- year maturity, semi-annual bond pricing at $780 now. The coupon rate is 7%. This company has a Beta of 1.3, risk free rate is 3% and SP 500 index return is 10% now With a tax rate 40%, please calculate the WACC. 1(a) How much is cost of debt? (In decimal format) 1(b) how much is cost of equity?(same format) 1(c) What is WACC? (same format) 2 You borrow $10,000 today with interest rate 7%, and you plan to pay the bank back with 8 equal annual payment. Please fill up the following table. 2(a) how much is the annual payment? 2(b) How much is the interest payment for year 3? 2(c) How much is the balance of principle at the end of year 8?Explanation / Answer
Year Principal Begin Year Payment End Year Interest Principal a b c = a*7% d = a + c -b 1 $10,000.00 $1,674.68 $700.00 $9,025.32 2 $9,025.32 $1,674.68 $631.77 $7,982.42 3 $7,982.42 $1,674.68 $558.77 $6,866.51 4 $6,866.51 $1,674.68 $480.66 $5,672.49 5 $5,672.49 $1,674.68 $397.07 $4,394.88 6 $4,394.88 $1,674.68 $307.64 $3,027.85 7 $3,027.85 $1,674.68 $211.95 $1,565.12 8 $1,565.12 $1,674.68 $109.56 $0.00 This is classic example of present value of annuity where Present Value - $10000 Rate - 7% Tenure - 8 years P - Annual Installment PV = P*[1 - (1+r)^-n]/r or, 10000 = P * [1 - 1.07^-8]/0.07 or, 10000 = P * 5.971299 or, P = $1674.68
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