Rekall Inc., the memory implant company, has 7 million shares of common stock ou
ID: 2806734 • Letter: R
Question
Rekall Inc., the memory implant company, has 7 million shares of common stock outstanding and 100,000 semiminusannual bonds. The bonds have 6 years to maturity, a 9.05% coupon rate and a face value of $1,000 each. The common stock currently sells for $29.94 and just paid a dividend of $2.50. Dividends are paid annually and are expected to grow in perpetuity at 3%. The bonds sell for 94% of face value and have a 10.42% yield to maturity. The afterminustax cost of debt is 7.294%, and the cost of equity is 11.6%. What is Rekall's WACC? A. 11.24% B. 9.51% C. 9.94% D. 7.09% E. 10.27%
Explanation / Answer
Calculation of WACC
Share Value of Rekall Inc = $ 7 Million Shares * $ 29.94
= $ 209.58 Million
Bond Value of Rekall Inc = 100000 bond *940(1000*94%)
= $ 94 Million
Weighted Average Cost of Capital = 10.27%
Option E is Correct
Source Cashflow Proportion % WACC Equity 209.58 Million 0.6904(209.58/303.58) 11.60%(Given) 8.01% Bond 94 Million 0.3096(94/303.58) 7.294%(Given) 2.26% Total 303.58 Million 1.00 10.27%