Please show all work, this is to help study for a final tomorrow! Given the foll
ID: 2765687 • Letter: P
Question
Please show all work, this is to help study for a final tomorrow!
Given the following data for a firm, calculate its WACC. The risk-free rate is 7% and the market risk-premium is 10%.
Tax Rate
40%
Beta
1.1
Coupon Rate
8%
Yield to Maturity on Debt
6%
Term to Maturity
20 years
Coupon Payments
Semi-Annual
Face Value of a Bond
$1,000
Quantity of Bonds Outstanding
15,000
Market Value of the Firm
$48,467,215.80
Tax Rate
40%
Beta
1.1
Coupon Rate
8%
Yield to Maturity on Debt
6%
Term to Maturity
20 years
Coupon Payments
Semi-Annual
Face Value of a Bond
$1,000
Quantity of Bonds Outstanding
15,000
Market Value of the Firm
$48,467,215.80
Explanation / Answer
WACC = * Re + * Rd * (1 – Tc)
Where:
When calculating a firm's WACC, the first step is to determine what proportion of a firm is financed by equity and what proportion is financed by debt by entering the appropriate values into the and components of the equation. Next, the proportion of equity () is multiplied by the cost of equity (Re); and the proportion of debt () is multiplied by the cost of debt (Rd).
Total debt structure= quantity of bond * face value of bond
= 15000 * $ 1000
= $ 15,000,000
Total equity = value of firm – debt structure
= 48,467,215.80 - 15,000,000
= $ 33,467,215.80
Re= rf + beta (rm-rf)
= .07+ 1.1 (.10 - .07)
= .103
WACC = * Re + * Rd * (1 – Tc)
= 33467215.8 * .103 + 15000000 * .08(1-.4)
48467215.80 48467215.80
= 0.071123 + 0.014855
= 0.085978 0r 08.59 %
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