WACC Calculations with Equity, Debt, and Market Value
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A firm is opening a new factory, initial investment required would be £5m, the firms current share capital is of 10 million ordinary shares of 10p each. the market price of the shares is 198p ex div (year 2005 = 7.35 dividend per share), the company has declared a single dividend each year, payable on 30 June.
the firm has 1 million 10% debentures redeemable on 30 June 2009, interest being payable each year on 30 June, the current price of the debentures is £85% ex interest.
the firm has an outstanding bank loan of £1m repayable on 30 June 2013. the loan attracts interest at variable rate, which is 1% above the banks base rate, currently 5%.
HOW would i put them figures into the WACC formula;
WACC = E/V * Re + D/V *Rd * (1-Tc)
Where:
Re = cost of equity
Rd = cost of debt
E = the market value of the firm's equity
D = the market value of the firm's debt
V = E + D
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
Tc = the corporate tax rate.
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Solution Summary
The solution explains how to calculate the WACC with equity, debt, and market value.
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See the attached file.
We need to calculate the cost of equity and the cost of debt ( there are 2 types of debt).
Cost of Equity - The company declares a single dividend each year. The formula for calculating the cost of equity Re with no growth in dividend is Re= Div/MP. Here Div =7.35 and the Market Price (MP) is 198. Re=7.35/198=3.7%.
Cost of Debenture - Given that the debenture has four years to maturity ( till 2009) pays 10% interest and is trading at 85% of price, we can calculate the YTM (yield to maturity) ...
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