Bonaime, Inc., has 6.5 million shares of common stock outstanding. The current s
ID: 2619524 • Letter: B
Question
Bonaime, Inc., has 6.5 million shares of common stock outstanding. The current share price is $61.50, and the book value per share is $4.50. The company also has two bond issues outstanding. The first bond issue has a face value of $70.5 million, a coupon rate of 7 percent, and sells for 95.5 percent of par. The second issue has a face value of $35.5 million, a coupon rate of 7 percent, and sells for 94.5 percent of par. The first issue matures in 20 years, the second in 12 years. The most recent dividend was $3.10 and the dividend growth rate is 6 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 35 percent.
What is the company’s WACC?
Explanation / Answer
COMPONENT COST OF CAPITAL: Cost of equity (using constant dividend growth model) = 3.10*1.06/61.50 + 0.06 = 11.34% Cost of debt: 1st Bond: YTM (using an online calculator) = 7.44% After tax cost of the bond = 0.0744*(1-0.35) = 4.84% 12nd Bond: YTM (using an online calculator) = 7.71% After tax cost of the bond = 0.0771*(1-0.35) = 5.01% Weighted average cost of debt: Market Value Weight Component cost Wt Avg 1st Bond (70.50*95.50%) 67.3275 0.667435 4.84% 3.23% 2nd Bond (35.50*94.50%) 33.5475 0.332565 5.01% 1.67% Overall cost of debt. 100.8750 4.89% WACC: Market Value Weight Component cost Wt Avg Debt 100.8750 0.201498 4.89% 0.99% Common stock (6.5*61.50) 399.7500 0.798502 11.34% 9.06% Overall cost of debt. 500.6250 10.04%