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    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 Preview

    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
    ...

    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.

    $2.49

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