Suppose a firm has 22 million shares of common stock outstanding at a price of $

Question

Suppose a firm has 22 million shares of common stock outstanding at a price of $28.1 per share. The firm also has 300,000 bonds outstanding with a current price of $1167.5. The outstanding bonds have yield to maturity 7.2%. The firm's common stock beta is 1.1 and the corporate tax rate is 37%. The expected market return is 15% and the T-bill rate is 6%. What is the WACC for this firm? Weight of Equity (3 decimals): Weight of Debt (3 decimals): Cost of Equity (3 decimals): After tax Cost of Debt (3 decimals): WACC (3 decimals):

Explanation / Answer

Total value of equity=(22,000,000*28.1)=$618,200,000

Total value of debt=(300,000*1167.5)=$350,250,000

Total=$968,450,000

Hence weight of equity=(618,200,000/968,450,000)=0.638

weight of debt=(350,250,000/968,450,000)=0.362

Cost of equity=Risk free rate+Beta*(Market rate-Risk free rate)

=6+1.1*(15-6)=15.9%

Cost of debt=YTM(1-tax rate)

=7.2*(1-0.37)=4.536%

Hence WACC=(15.9*0.638)+(4.536*0.362)=11.786%(Approx)

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