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# WACC

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A company has three debt issues outstanding:
1. 7.5% Notes maturing Dec 31, 2018 (\$200 million face value), market price \$953.75
2. 8% Bonds maturing Dec 31, 2023 (\$300 million face value), market price \$980.25
3. 8.5% Bonds maturing Dec 31, 2027 (\$300 million face value), market price \$1,019.71.
Use 6.5% risk-free rate and 7% market risk premium to compute the company's cost of equity. There are 10 million shares of common stock outstanding, and 8 million shares of preferred stock outstanding. The preferred pays an annual dividend of \$6 and currently sells for \$50 per share. The tax rate is 30%. Assume you do the WACC calculation on Jan 1, 2010, and the semi-annual interest payments of the notes and bonds have just been paid. Below are the weekly closing prices for the company and the S&P 500 index.

Date, Company, S&P 500
12/4/09, 175, 1428.23
11/27/09, 176.25, 1440.7
11/20/09, 178.25, 1458.74
11/13/09, 177.75, 1453.7
11/6/09, 184, 1509.65
10/30/09, 186.75, 1535.28
10/23/09, 183, 1500.63
10/16/09, 189.75, 1561.8
10/9/09, 189.25, 1557.59
10/2/09, 185.75, 1526.75
9/25/09, 185.75, 1525.75
9/18/09, 181, 1484.25
9/11/09, 177.75, 1453.55
9/4/09, 180, 1473.99
8/28/09, 180.50, 1479.32
8/21/09, 177, 1445.94
8/14/09, 177.75, 1453.64
8/7/09, 175.50, 1433.06
7/31/09, 178.25, 1458.95
7/24/09, 186.50, 1534.1
7/17/09, 188.50, 1552.5
7/10/09, 186.25, 1530.44
7/3/09, 183.25, 1503.35
6/26/09, 183, 1502.56
6/19/09, 186.50, 1532.91
6/12/09, 183.75, 1507.67
6/5/09, 186.75, 1536.34
5/29/09, 184.50, 1515.73
5/22/09, 185.25, 1522.75
5/15/09, 183.50, 1505.85

#### Solution Summary

The solution explains how to calculate the component costs of capital and the WACC

\$2.19