You have been asked to calculate the WACC for a firm. The firm has short-term de
ID: 2758069 • Letter: Y
Question
You have been asked to calculate the WACC for a firm. The firm has short-term debt that has a return of 4.50%. The amount outstanding of the short-term debt is $100 million. The firm also has long-term debt that has a par amount of $300 million, a coupon rate of 6.00%, a maturity of 10 years and a yield to maturity of 6.70%. The firm also has 10 million shares outstanding that is currently trading at $50 per share and has a beta of 1.2. In addition the firm has preferred stock that has 2 million shares outstanding, pays an annual dividend of $5.25 per share. It is trading in the market at $78 per share.
The risk free rate is 2.00%, the risk premium on the market is 6.00% and the firms tax rate is 30%. Assume the bonds are semi annual coupons. What is the WACC of the firm?
Explanation / Answer
All Amounts in $ million Calculation of Individual Capital Cost Particulars Amount Cost Weighted in $ % Cost $ Short Term Debt 100 4.5 4.5 Long-Term Debt 300 4.2 12.6 Common Stock 500 4.8 24 Preferred Stock 156 6.7 10.5 Total 1056 51.6 WACC = Weighted Cost / Total Amount of Capital = 51.6 / 1056 = 4.89%
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