AT&T; LTE 1:08 PMM 76% mail-attachment.googleusercontent.c ¢ Weighted Average Co
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AT&T; LTE 1:08 PMM 76% mail-attachment.googleusercontent.c ¢ Weighted Average Cost of Capital .ABC Corporation has 3,000,000 shares outstanding and they are trading at a price of S50 each. The number of Preferred Stock outstanding is 2,500,000 and they are trading at S4 per share and pay a constant dividend of $0.80 every year for ever. The company has bonds whose market value is S51,750,000 and they are trading at a premium of S1,750,000. These bonds pay an average coupon of 9% and have an average time to rnaturity of 10 years. The Risk free rate of Return is 4%; the Return on the Market is 8% and the of this firm is 2.5. Assume that taxes are 30%; find the WACC? 2. XYZ Corporation has 1,000,000 shares outstanding and they are trading at $5 each share. The firm paid a dividend of S1 in Year 1 and the dividend is expected to grow at a constant rate of 10% forever. The firm has Preferred Stock valued at $2,000,000 on 1,000,000 shares and the Preferred Stock pays a constant dividend of S0.20 every year forever. You determine that the firm has debt whose book value is $3.000.000 and it pays a average coupon of 10%. The average YTM of the debt is 12%. Assume that taxes are 30%, find the WACC?Explanation / Answer
WACC = (We X Ke) + (Wp X Kp) + (Wd x Kd X (1-T))
Where,
We = Weight of Equity (Equity Value divided by Firm Value)
Ke = Cost of Equity
Wp = Weight of Preference shares
Kp = Cost pf Preference Shares
Wd = Weight of debt
Kd = Cost of Debt
T = Tax rate
Cost of Equity = Risk free rate + Beta X (Market Return – Risk free return)
= 0.04 + 2.5 X (.08-.04)
= 0.14 or 14%
Value of Equity = Number of shares outstanding in the market X Trading price
= 3,000,000 X 50
= 150,000,000 $
Cost of Preference shares = Preferred dividend per share ÷ Market Price per preferred share
= 0.8 ÷ 4
= 0.2 or 20%
Value of Preference stock = Number of preference shares outstanding X Market trading price
= 2,500,000 X 4
= 10,000,000 $
Cost of Debt = 9%
After tax cost of debt = Coupon rate X (1 – Tax)
= 0.09 X (1 – 0.30)
= 0.063 or 6.3%
Value of Debt = C[(1 – (1/((1 + Kd)^t)))/Kd] + [FV/((1 + Kd)^t)]
Where C is the interest expense (50,000,000 X 9% = 4,500,000),
Kd is the current cost of Debt
T is the weighted average maturity, and
FV represents the face value of total debt (51,750,000 – 1,750,000 = 50,000,000)
= 4,500,000[(1-(1/((1+0.09)^10)))/0.09] + [50,000,000/((1+0.09)^10)]
= 59,796,406
Total Market value of firm = [{150,000,000/(150,000,000+10,000,000+62,376,911)} X 0.14]
+ [{10,000,000/(150,000,000+10,000,000+62,376,911)} X 0.2]
+ [{62,376,911/(150,000,000+10,000,000+62,376,911)} X 0.09] X (1-.3)
= .1211 or 12.11 %
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