WACC Calculations Cost of Equity Calculations: Stock price $ 35.50 Div(0) $ 3.50
ID: 464529 • Letter: W
Question
WACC Calculations Cost of Equity Calculations: Stock price $ 35.50 Div(0) $ 3.50 g 3.25% Beta 1.20 Risk-free rate 4.25% Market risk premium 8.00% Cost of equity: SML 13.8500% DCF ? Average ? << Use this in WACC calculations Cost of Debt Calculations Years to maturity 10.5 N Coupon rate 5.00% PMT Coupon schedule semiannual Current price 92.0% PV Face Value $ 1,000 FV Cost of Debt Semiannual ? Annual ? WACC Calculations Percent debt 35% Cost of debt ? Tax rate 35% Percent equity 65% Cost of equity ? WACC ? WACC Calculations Cost of Equity Calculations: Stock price $ 35.50 Div(0) $ 3.50 g 3.25% Beta 1.20 Risk-free rate 4.25% Market risk premium 8.00% Cost of equity: SML 13.8500% DCF ? Average ? << Use this in WACC calculations Cost of Debt Calculations Years to maturity 10.5 N Coupon rate 5.00% PMT Coupon schedule semiannual Current price 92.0% PV Face Value $ 1,000 FV Cost of Debt Semiannual ? Annual ? WACC Calculations Percent debt 35% Cost of debt ? Tax rate 35% Percent equity 65% Cost of equity ? WACC ?Explanation / Answer
Cost of equity under DCF
Ke = Do x(1+g)/P +g
= 3.50 x (1+0.0325)/ 35.50 +0.0325
= 13.43%
Average Ke = (13.43%+13.85%)/ 2 = 13.64%
Cost of debt
N= 10.50 x 2 = 21
Fv = 1000x5%/2 = 25
PV = 1000 x 92% = 920
Solving for rate, using rate function:
Semiannual cost of debt = 3.02%
Annual cost of debt = 3.02% x2 =6.04%
WACC calculation
% debt = 35%
Cost of debt = 6.04%
% equity = 65%
Cost of equity = 13.64%
WACC = % debt x cost of debt x (1-t) + % equity x cost of equity
= 0.35 x0.0604 x(1-0.35) + 0.65 x 0.1364
= 10.24%
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