Question

If Qual Corp. currently trades at $20/ per share, with 5 million shares outstanding. Their total debt is 50 million with 10- year maturity, annual bond pricing at $780 now. The coupon rate is 7%. This company has a Beta of 1.5, risk free rate is 3% and SP 500 index return is 10% now. With a tax rate 40%, please calculate the WACC.

Answer 1

To calculate the weighted average cost of capital (WACC), we need to factor in the cost of both debt and equity. Using the given information, we calculate the WACC for Qual Corp. to be 14.2%.

Step-by-step explanation:

To calculate the weighted average cost of capital (WACC), we need to factor in the cost of both debt and equity. The formula for WACC is: WACC = (E/V) * Re + (D/V) * Rd * (1 - Tax Rate), where E is the market value of equity, V is the total market value of debt and equity, Re is the cost of equity, D is the market value of debt, Rd is the cost of debt, and Tax Rate is the corporate tax rate.

In this case, we have the following information:

• E = $20 * 5 million = $100 million
• V = $100 million (equity) + $50 million (debt) = $150 million
• Re = Risk-Free Rate + Beta * (S&P 500 Index Return - Risk-Free Rate) = 3% + 1.5 * (10% - 3%) = 12%
• Rd = Annual bond pricing = $780
• Tax Rate = 40%

Plugging these values into the WACC formula, we get:

WACC = (100/150) * 12% + (50/150) * 780 * (1 - 40%) = 8% + 6.2% = 14.2%

Therefore, the WACC for Qual Corp. is 14.2%.

Learn more about Weighted Average Cost of Capital here:

Answer 2

WACC = 0.10890 or 10.890%

Step-by-step explanation:

The WACC or weighted average cost of capital is the cost of a firm's capital structure which contain either one or more of the following namely debt, preferred stock and common equity.

For a firm containing only two components namely debt and common equity, the formula for WACC is,

WACC = wD * rD * (1-tax rate) + wE * rE

Where,

• w represents the weight of each component

• r represents the cost of each component

First we will calculate the weights of each component and the cost of equity.

Total value of common equity = 20 * 5 million = $100 million

Total value of debt = $50 * 780/1000 = $39 million

Total value of capital structure = 100 + 39 = 139 million

wD = 39 / 139

wE = 100 / 139

Using CAPM we calculate the cost of equity to be,

rE = 0.03 + 1.5 * (0.1 - 0.03) = 0.135 or 13.5%

WACC = 39/139 * 0.07 * (1 - 0.4) + 100/139 * 0.135

WACC = 0.10890 or 10.890%