What is the WACC for a company with the following financing outstanding? Debt: 4

Question

What is the WACC for a company with the following financing outstanding?

Debt:
40,000 bonds with 7% coupon rate, current price quote of 119.80 & 25 years to maturity
15,000 zero coupon bonds, price quote of 18.2 & 30 years to maturity

Preferred Stock:
100,000 shares of 4% preferred stock, current price of $78 and par value of $100

Common Stock:
1,800,000 shares of common stock, current price is $65 and beta of stock is 1.1

Market:
Corp tax rate is 40%, market risk premium is 7%, risk-free rate is 4%

Explanation / Answer

Here first we need to findout the cost of the Debt : rD = 7%(1-.40) = 4.2% rP = D / P = $4 / $78 = 5.12% rE= 1.1(7%-4%)+4% (CAPM) = 7.3% calculating the Weights : The total value of the firm vE = [(40000*1000+15000*1000)+100000*78)+($1800000*$65)] = $65000000+$7800000+$140400000 = $213200000 wD = $65000000 / $213200000 = 0.30 wP = $7800000 / $213200000 = 0.05 wE = $140400000 /$213200000 = 0.65 WACC = wD*rD(1-Tc)+wP*rD+wE*rE = 0.3*0.07(1-0.4)+0.05*0.0512+0.65*0.073 = 6.27%

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