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WACC

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A stock analyst has obtained the following information about J-Mart, a large retail chain:

(1) The company has noncallable bonds with 20 years maturity remaining and a maturity value of $1,000. The bonds have a 12 percent annual coupon and currently sell at a price of $1,273.8564.

(2) Over the past four years, the returns on the market and on J-Mart were as follows:
Year Market J-Mart
2002 12.0% 14.5%
2003 17.2 22.2
2004 -3.8 -7.5
2005 20.0 24.0

(3) The current risk-free rate is 6.35 percent, and the expected return on the market is 11.35 percent. The company's tax rate is 35 percent.

The company anticipates that its proposed investment projects will be financed with 70 percent debt and 30 percent equity. What is the company's estimated weighted average cost of capital (WACC)?

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Solution Summary

The solution explains how to calculate the WACC

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(1) The company has noncallable bonds with 20 years maturity remaining and a maturity value of $1,000. The bonds have a 12 percent annual coupon and currently sell at a price of $1,273.8564.

We use this data to find the Yield to maturity (YTM) on the existing bonds. The YTM is the current cost of debt and should be taken in the calculation of WACC.
To calculate the YTM we use the RATE function in ...

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