You are a manager for Humana Inc., and you are trying to determine the appropria

Question

You are a manager for Humana Inc., and you are trying to determine the appropriate discount rate to use in valuations of average risk project proposals for the company. You have the following information: YTM on 10-year Treasury bill: 2.359% Beta on common stock: 058 Expected return on market portfolio: 8.5% Additionally, you collected the following information from Humana's most recent annual financial disclosure and market prices on current bond issues Bond Issue Coupon Rate Total Book Value In millions) Market Price Quote (per bond) YTM 7.20 500 2.24 $500 million, 7.20% due June 15. 2018 300 2.42 $300 million, 6.30% due August 1. 2018 million, 2.625% due 2.62 400 93 1, 2019 600 million, 3.15% due 3.15 103.12 2.48 1, 2022 million, 3 85% due October 3.8 98 3.23 2024 $250 million, 8.15% due June 15, 2038 $400 million, 4 625% due 8.150% 250 48.22 462 99,65 4.65 1, 2042 $750 millon, 4.95% due October 4.95 2044 The market price for one share of common stock is $255.27, and there are 146.280 million shares outstanding. Assume Huamana's marginal tax rate is 35%. What s Humanas WACC with taxes)? Assume the current D/E ratio is the same as the target /E ratio. Enter your answer as a decrme rounding to the nearest ten thousandth. For example, write "123%" as 0123

Explanation / Answer

CALCULATION OF COST OF DEBT A B C D=B*(C/100) E=A*B E*(1-0.35) Coupon rate Book value Market price Total market Total coupon After tax coupon ($million) per bond Price($million) payment($million) payment($million) 7.20% 500 104 520 36 23.4 6.30% 300 101 303 18.9 12.285 2.63% 400 98 392 10.5 6.825 3.15% 600 103.12 618.72 18.9 12.285 3.85% 600 98 588 23.1 15.015 8.15% 250 148.22 370.55 20.375 13.24375 4.625% 400 99.65 398.6 18.5 12.025 4.95% 750 100 750 37.125 24.13125 TOTAL 3940.87 TOTAL 119.21 After tax cost of Debt=(119.21/3940.87)*100%= 3.025% CALCULATION OF COST OF EQUITY Expected return on market portfolio 8.50% YTM on 10 year Treasury bill 2.359% Beta of common stock 0.58 Cost of equity=Expected return of stock=Rf+Beta*(Rm-Rf) Rf=Risk free rate=YTM on Treasury bill=2.36% Rm=market return=8.5% Beta-0.58 Cost of Equity=2.359%+0.58*(8.5-2.359)= 5.921% CALCULATION OF After Tax Weighted Average Cost of Capital(WACC) A Market value of Equity 37340.8956 $ million (255.27*146.280) B Market value of Debt 3940.87 $ million C=A(/A+B) Weight of Equity 0.904537271 D=B/(A+B) Weight of Debt 0.095462729 WACC=Weight of debt*Cost of debt+Weight of equity*Cost of equity WACC= 0.056443377 (0.095462729*3.025+0.904537271*5.921)% WACC 0.0564 (rounded to 4 decimal places)

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.