Bonaime, Inc., has 6.2 million shares of common stock outstanding. The current s
ID: 2583506 • Letter: B
Question
Bonaime, Inc., has 6.2 million shares of common stock outstanding. The current share price is $61.20, and the book value per share is $4.20. The company also has two bond issues outstanding. The first bond issue has a face value of $70.2 million, a coupon rate of 7.2 percent, and sells for 97 percent of par. The second issue has a face value of $35.2 million, a coupon rate of 6.7 percent, and sells for 96 percent of par. The irst issue matures in 22 years, the second in 14 years. The most recent dividend was $2.95 and the dividend growth rate is 8 percent.Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 30 percent. tor97 percent f ar Th and the diwidend growrh rate What is the company's WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) WACCExplanation / Answer
WACC = 11.14%
Workings:
Cost of equity = Dividend per share / Current market value +Growth rate of dividends
Ke =2.95/61.20 + 0.08 = 0.048+0.08 = 0.128. or 12.8 %
Cost of debt = Coupon rate x (1-tax rate)
Cost of first bond (Kd1) = 7.2%x (1.00 - 0.30) = 5.04%
Cost of second bond (Kd2) = 6.7 % x (1.00-0.30) = 4.69%
Market value of equity (E) = 6.2 million shares x $61.20 = $379.44 million
Market value of first bond (D1) = $70.2 milion x 97% = $68.094 million
Market value of second bond (D2) = $35.2 million x 96% = $33.792 million
Market value of total capital (V) = $379.44 m + 68.094 m + $33.792 m = $481.326 m
Weighted average cost of capital (WACC) = E/V(Ke) + D1/V (Kd1) + D2/V (Kd2)
= (379.44 / 481.326) x(12.8%) +( 68.094/481.326)x(5.04%) + (33.792/481.326) x (4.69%)
=0.79 x 12.8% + 0.14 x 5.04% + 0.07 x 4.69% = 0.10112+0.007056+0.003283 = 0.111459 =11.14%