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WACC Component Calculations

A Company has the following sources of financing reported on its balance sheet:

Liabilities & Equity

Debt (13% coupon bonds, $1000 face value)--> Book Value= $4,000,000
Common stock, 100,000 shares--> Book Value=$6,000,000
Total $10,000,000

The bonds are currently selling for $900, and have a yield-to-maturity of 15%. The common stock is currently priced at $70 per share, and has an estimated beta of 1.5. The current risk-free rate is 6%, and the expected return on the market portfolio is 16%. The company pays taxes at the rate of 40%.

Compute the firm's Cost of debt, cost of common stock, estimated weight of debt, estimated weight of common stock, and the weighted average cost of capital.

All calculations are needed, please show them so I can understand the process. Thank you.

Solution Preview

Cost of Debt = Yield to Maturity of Debt = 15%

Cost of Common Stock:
Risk Free Rate + Beta * (Market Premium)
=> 6% + 1.5*(16% - 6%)
=> ...

Solution Summary

The solution shows detailed steps on how to calculate the WACC using its component parts - weight of debt, cost of debt, weight of stock, cost of stock. Detailed steps are provided with all the appropriate calculations.

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