Please show all work...thank you To estimate the company\'s WACC, Marshall Inc.

Question

Please show all work...thank you

To estimate the company's WACC, Marshall Inc. recently hired you as a consultant. You have obtained the following information. The firm's noncallahlc bonds mature in 20 years, have an 8.00% annual coupon, a par value of $1,000, and a market price of SI,050.00. The company's tax rate is 40%. The risk-free rate is 4.50%, the market risk premium is 5.50%, and the stock's beta is 1.20. The target capital structure consists of 35% debt and the balance is common equity. The firm uses the CAPM to estimate the cost of common stock, and it does not expect to issue any new shares. What is its WACC?

Explanation / Answer

First we have to find the total yield to maturity of bonds

=RATE(20,-80,1050,-1000,0,0)

=7.51%

return on equity = 4.5% + 1.2*(5.5%)

11.1%

WACC = 7.51%*.35*(1-.4)+ 0.65*11.1%

=8.79%

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