Mr. Williams is purchasing an entire bottling plant for $42,500,000. He has a ta

Question

Mr. Williams is purchasing an entire bottling plant for $42,500,000. He has a tax rate of 35 percent.

He has a contract to bottle for SNAP-ON ICE TEA. The break- even numbers of the factory are good and Bonika Financial has calculated the IRR of the deal at 22%.The capital structure of Mr. Williams new bottling plant is as follows: $10,000,000 in equity at 6%, a preferred investors owns 100,000 shares of $25 each that pays a dividend of $5 annually. The rest of the capital structure is financed with debt which carries an annual interest expense of $3,000,000.

Calculate the WACC of the bottling plant.

Explanation / Answer

Debt Balance = 42500000 - 10000000 - (25 * 100000) = 30000000

Cost of debt = 3000000 / 30000000 * (1 - tax) = 10% * 0.65 = 6.5%

Cost of preferred stock = 5 / 25 = 20%

Component Value Weight Rate WACC Common Stock    10,000,000.00 23.53% 6% 1.41% Preferred Stock      2,500,000.00 5.88% 20% 1.18% Debt    30,000,000.00 70.59% 6.50% 4.59%    42,500,000.00 WACC: 7.18%

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