Vedder, Inc., has 7.9 million shares of common stock outstanding. The current sh
ID: 2754333 • Letter: V
Question
Vedder, Inc., has 7.9 million shares of common stock outstanding. The current share price is $62.90, and the book value per share is $5.90. Vedder also has two bond issues outstanding. The first bond issue has a face value of $71.9 million, a coupon rate of 7.4 percent, and sells for 88.5 percent of par. The second issue has a face value of $36.9 million, a coupon rate of 8.4 percent, and sells for 87.5 percent of par. The first issue matures in 18 years, the second in 10 years. The most recent dividend was $3.80 and the dividend growth rate is 5 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 40 percent.
Required: What is the company’s WACC? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) WACC %
Explanation / Answer
Expected Return/Cost of Equity = (3.8 / 62.9 * 100) * 1.05 = 6.34 %
Current Market value of Equity = 7.9 million shares * $62.9 =$496.91 million
1st Bond Market value = $71.9 million
Cost of 1st Bond =Discount on issue + interest coupon rate
= 11.5% + 7.4% = 18.9%
2nd Bond Market value = $36.9 million
Cost of 2nd Bond = 12.5% + 8.4% = 20.9%
Total Capital value of the company = $605.71 million
The Company's WACC = 496.91/605.71 * 6.34% + 71.9/605.71 * 18.9% (1-0.40) + 36.9/605.71 * 20.9% (1-0.40)
= 0.052011843 + 0.013460995 + 0.007639398 = 0.0732
Company's WACC = 7.32 %
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