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    Finding the Weighted-Average Cost of Capital

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    Weighted Average Cost of Capital (WACC)

    Jenny, the financial vice-president of Leonus Corporation, has been given the task of determining Leonus's WACC. The WACC will be used as the discount rate on capital budgeting projects to find the net present value of the projects.
    Leonus currently has a bond issue outstanding that Jenny will use to determine investors' required return on Leonus's bonds. The bond has a face value of $100 million, has a 7% coupon rate with interest paid annually, has 10 years remaining to maturity, and sells at 107.36% of par. Leonus's marginal tax rate is 35%.
    On the balance sheet, Leonus has $50 million in shareholders' equity. This consists of $10 million in Common Stock and $40 million in Retained Earnings.
    They have ten million common shares outstanding. Their stock price per share is currently $40.
    The risk-free rate of return is 4%. Leonus uses a market risk premium of 6%. Leonus's stock has a beta of 1.5.
    Leonus has no preferred stock outstanding.
    Find Leonus's weighted average cost of capital.

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    Solution Summary

    Jenny, the financial vice-president of Leonus Corporation, has been given the task of determining Leonus's WACC. The WACC will be used as the discount rate on capital budgeting projects to find the net present value of the projects.
    Leonus currently has a bond issue outstanding that Jenny will use to determine investors' required return on Leonus's bonds. The bond has a face value of $100 million, has a 7% coupon rate with interest paid annually, has 10 years remaining to maturity, and sells at 107.36% of par. Leonus's marginal tax rate is 35%.
    On the balance sheet, Leonus has $50 million in shareholders' equity. This consists of $10 million in Common Stock and $40 million in Retained Earnings.
    They have ten million common shares outstanding. Their stock price per share is currently $40.
    The risk-free rate of return is 4%. Leonus uses a market risk premium of 6%. Leonus's stock has a beta of 1.5.
    Leonus has no preferred stock outstanding.
    Find Leonus's weighted average cost of capital.

    $2.19