Question

Debt: 2,000 par value bonds with a 15-year maturity, 7.2% coupon, which are currently selling for 105 percent of par. Common stock: 1M shares outstanding, selling for $20 per share, and a fixed dividend of $2.50 per year. Preferred stock: 9,500 shares of preferred stock with a 6 percent required return, currently selling for $55 per share. What is the company's WACC

Answer 1

Answer:

17.03 %

Explanation:

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

where,

Cost of Debt is calculated as :

Per $100 of bonds

FV = $100

PV = ($105)

PMT = $100 x 7.20% = $7.20

N = 15

P/yr = 1

r = ?

Using a financial calculator to enter values as above, cost of debt (r) is 6.66%

We always use after tax cost of debt

Therefore,

After tax cost of debt = interest x (1 - tax rate)

                                    = 4.995%

therefore,

WACC = 12.50 % x 96.51% + 4.995% x 0.965 + 6.00 % x 2.52 %

           = 17.03 %