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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.

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Calculating WACC

A Corp. has no debt but can borrow at 8 %. The firm's WACC is currently 12% and has tax rate of 35%.

a. What is the cost of equity?

b. If the Corp. converts to 25 % debt,what will cost of equity be? 50 %?

c. What is shadow's WACC for part b: 25 % and 50 %.

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