1. The total market value of BHP’s assets is $60,000,000. These assets are finan
ID: 2727686 • Letter: 1
Question
1. The total market value of BHP’s assets is $60,000,000. These assets are financed by $30,000,000 worth of issued bonds and $30,000,000 worth of issued ordinary shares. The bonds have an 8% annual coupon and are currently selling at their face value of $1000. The ordinary shares are currently selling at $30 and will pay a dividend at time 1 of $4.50 with dividends expected to grow at 1% forever. The tax rate is 30%.
a) What is the WACC of BHP according to the above information?
b) BHP decides to buy back $5,000,000 of its ordinary shares and issue $5,000,000 worth of new bonds. If the new bonds have an annual coupon rate of 5%, a maturity of 5 years, a face value of $1000 and similar bonds in the market yield 4%, how many bonds would BHP have to issue to raise the $5,000,000?
Explanation / Answer
a) What is the WACC of BHP according to the above information?
Cost Of debt =8%*(1-.30) =6%
Cost of Equity =D1/(Po)+G =4.50/30 +1% =16%
b)
We need to find the Current Value of bond
No of bonds to be issued = $5,000,000/1044.52 =4787 No Of bonds
Cost Of Capital Weight WACC =Cost Of Capital*Weight Debt 3,00,00,000 6% 50% 2.80% ordinary shares 3,00,00,000 16% 50% 8.00% WACC 10.80%Related Questions
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