Erna Corp. has 6 million shares of common stock outstanding. The current share p
ID: 2629639 • Letter: E
Question
Erna Corp. has 6 million shares of common stock outstanding. The current share price is $85, and the book value per share is $8. Erna Corp. also has two bond issues outstanding. The first bond issue has a face value of $65 million, has a coupon rate of 8 percent, and sells for 95 percent of par. The second issue has a face value of $40 million, has a coupon rate of 9 percent, and sells for 108 percent of par. The first issue matures in 23 years, the second in 5 years. Suppose the most recent dividend was $5.70 and the dividend growth rate is 4 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 38 percent. What is the companys WACC?
Explanation / Answer
a. The book value of equity is the book value per share times the number of shares, and the book value of debt is the face value of the company