Estimating The After-Tax WACC-Bonds Sold At A Premium
Fuerst Cola has 10,000 bonds and 400,000 shares outstanding. The bonds have a 10% annual coupon, $1,000 face value, $1,050 market value, and 10-year maturity. The beta on the stock is 1.30 and its price per share is $40. The riskless return is 6%, the expected market return is 14%, and Fuerst Cola's tax rate is 40%.
a.What is the after-tax cost of debt financing?
b.What is the after-tax cost of equity financing?
c.What is the WACC?
Please show step by step how you reached the results, ie. what functions were used, formula, how it should be posted in excel, etc.
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Solution Preview
Please see the attached Excel 97-2003 file.
Because the bonds are selling at a premium to their face (par) value, we must determine the market rate of return on them (which is also their cost). We use the Excel ...
Solution Summary
Using an Excel 97-2003 spreadsheet, this solution illustrates the computation of the after tax weighted-average cost of capital when the market values of bonds exceed their par (face) values.