Assuming that STI\'s corporate tax rate is 40%, what is the firm\'s WACC? a. Deb
ID: 2750791 • Letter: A
Question
Assuming that STI's corporate tax rate is 40%, what is the firm's WACC?
a. Debt: The firm has recently issued bonds that have a total face value of $111,635,000. The bonds have a 9.15% coupon rate, which is paid semiannually. They have 38 years to maturity and currently sell for 92.78% of par.
b: Common Stock: There are 3.465 million shares They recently paid a dividend of $16.76 and the growth rate is 6.5 %. The firm's Beta is 2.67. The book value per share is $13.
c. Preferred stock: There are 234,000 shares of 6.75% preferred stock outstanding. These shares have a required return of 4.85%, and their par value is $100.
d. Market Information: The current risk-free rate is 3.6%, and the market return is 11.8%.
Explanation / Answer
Cost of debt Redemption value= 111635000 Issue price= 111635000*92.78%= 103574953 Interest= 111635000*9.15%=10214603 Cost of debt=[ Interst+ (redemption-issue price)/No of years](1-Tax) /(Redemption+issue)/2 [ 10214603+(-103574953+111635000)/38](1-40%)/ (111635000+103574953)/2 [10214603+212107](1-40%)/107604977 5.81% Cost of common stock= Risk free rate+ beta(Market Return- Risk free rate) = 3.6%+2.67(11.8%-3.6%) = 3.6%+21.894% = 25.494% Cost of preferred stock= 6.75% weighted average cost of capital Book value' Proportion Cost WACC= proportion * cost common stock 3.6465*1000000*13 47404500 27.18468213 25.49% 6.930463 Debt 103574953 59.39630571 5.81% 3.450925 Preferred stock 23400000 13.41901216 6.75% 0.905783 174379453 100 11.28717 Firms WACC= 11.28717%