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    Calculate for WACC

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    Please help with the following problem.

    A firm has 2,000,000 shares of common stock outstanding with a market price of $2.00 per share. It has 2,000 bonds outstanding, each selling for $1,200. The bonds mature in 15 years, have a coupon rate of 10% and pay coupons annually. The firm's beta is 1.2, the risk free rate is 5%, and the market risk premium is 7%. The tax rate is 34%. Calculate the WACC?

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    Solution Preview

    We need to calculate the yield to maturity of the bond by using the formula as follows: -
    where B is the issued price
    C is the coupon payment
    r is the discount or yield rate
    n is the period

    Then, we can replace the information into the equation. Coupon payment is equal to $1,000 x 10% = 100)

    The issued price of the bond is equal to

    2,400,000 = 200,000 x [1 - 1 ] + 2,000,000
    (1 + r)15 (1 + r)15

    Solution Summary

    This solution is comprised of a detailed explanation and calculation to find WACC.