Calculating the Weighted Average Cost of Capital (WACC)
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Based on the information below, calculate the weighted average cost of capital.
Great Corporation has the following capital situation.
Debt: One thousand bonds were issued five years ago at a coupon rate of 8%. They had 25-year terms and $1,000 face values. They are now selling to yield 9%. The tax rate is 39%
Preferred stock: Two thousand shares of preferred are outstanding, each of which pays an annual dividend of $7.50. They originally sold to yield 15% of their $50 face value. They're now selling to yield 8%.
Equity: Great Corp has 133,000 shares of common stock outstanding, currently selling at $12.48 per share. Dividend expected for next year is $.80 and the growth rate is 6%.
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Solution Summary
Solution depicts the steps to calculate the cost of individual components of capital. It also estimates the weighted average cost of capital(WACC) in the given case.
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Let us calculate current value of bond.
Tax Rate=T=39%
Required rate of return=rd=9%
Coupon payment=C=1000*8%=$80
Number of coupon payments left=n=20
Maturity amount of bond=M=Face Value=$1000
Fair price of a bond is given as
Current price of bond=C/r*(1-1/(1+r)^n)+M/(1+r)^n
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Education
- BEng (Hons) , Birla Institute of Technology and Science, India
- MSc (Hons) , Birla Institute of Technology and Science, India
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