Question

Daniel's Sound Systems has 210,000 shares of common stock outstanding at a market price of $36 a share. Last month, Daniel's paid an annual dividend in the amount of $1.593 per share. The dividend growth rate is 4%. Daniel's also has 6,000 bonds outstanding with a face value of $1,000 per bond. The bonds carry a 7% coupon, pay interest annually, and mature in 4.89 years. The bonds are selling at 99% of face value. The company's tax rate is 34%. What is Daniel's weighted average cost of capital

Answer 1

Answer:

0.0038 %

Explanation:

WACC = Cost of Equity x Weight of Equity + Cost of Debt x Weight of Debt

where,

Cost of Equity Calculation

Cost of Equity = ($1.593 x 1.04) ÷ $36 + 0.04 = 11.33 %

Cost of Debt Calculation

PMT = 1000 x 7 % = $70

N = 4.89

PV = $ 1,000 x 99 % = $990

FV  = 1,000

P/YR = 1

YTM = ?

Therefore Pre- tax cost of debt is 7.25 %

After tax cost of debt = 7.25 % x ( 1 - 0.34)

                                    = 4.79 %

Weight of Equity = 210,000 x $36 / (210,000 x $36 + 6,000 x $1,000)

                            = 0.0010

Weight of Debt = 6,000 x $1,000 / (210,000 x $36 + 6,000 x $1,000)

                            = 0.00079

Now

WACC = 11.33 % x 0.0010 + 4.79 % x 0.00079

Therefore

Daniel's weighted average cost of capital is 0.0038 %

Answer 2

Common stock is corporate equity, a type of security as ownership in a corporation. The weighted average cost of capital (WACC) will be 0.0038 %.

What is WACC?

The weighted average cost of capital (WACC) is the amount a corporate is expected to pay its deposit holders for funding their assets. It is calculated as:

$\rm WACC = \text{Cost of Equity} \times \text{Weight of Equity} + \text{Cost of Debt }\times \text{Weight of Debt}$

The cost of equity is calculated as:

$\begin{aligned}\text{Cost of Equity} &= \dfrac{(\ 1.593 \times 1.04)}{\ 36 + 0.04}\\\\&= 11.33 \%\end{aligned}$

The cost of debt is calculated as:

Given,

Maturity year = 4.89 years

Face value = $1000

The pre-tax cost of the debt is 7.25% and after-tax the cost will be,

$7.25 \% \times ( 1 - 0.34) = 4.79 \%$

The weight of equity is calculated as:

$\dfrac{210,000 \times \ 36}{ (210,000 \times \ 36 + 6,000 \times \ 1,000)} = 0.0010$

The weight of debt is calculated as:

$\dfrac{6000\times \ 1000}{ (210,000 \times \ 36 + 6,000 \times \ 1,000)} = 0.00079$

WACC is calculated as:

$(11.33 \% \times 0.0010)+ (4.79 \% \times 0.00079)= 0.0038 \%$

Therefore, Daniel's WACC is 0.0038 %.

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