Debt: 3,000 6 percent coupon bonds, with 10 years to maturity, and a quoted pric

Question

Debt: 3,000 6 percent coupon bonds, with 10 years to maturity, and a quoted price of 90. These bonds pay interest quarterly.

Common stock: 200,000 shares of common stock selling for $30. The stock will pay a dividend of $1.50 next year. The dividend is expected to grow by 5 percent per year indefinitely. The beta of the stock is 1.8. Preferred stock: 10,000 shares of 10 percent preferred selling at $80.

Market: The corporate tax rate is 35 percent, the expected return on the market is 10 percent, and the risk-free rate is 1 percent.

FIND WACC

Explanation / Answer

Cost of debt => (3000*90 * 6% * 3/12) - 35% / 270000 => 0.975%

Cost of equity =>( 1.50 / 30) + 5% => 11%

Cost of preferred Stock =>( 80000 / 800000) *100 => 10%

WACC => (0.975% * 1.41) + (11% * 93.90) + (10% * 4.69)

WACC => 10.81%

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