Question

Company XYZ, has the following capital structure:Debt $50MCommon $30MPreferred of $20MPrice of 5-year, par value 6% annual coupon Bonds that sell today for $1,050.Preferred dividend in year 1 of $5 and a preferred stock price of $90.Common stock has a required return of 12%Tax rate is 40%Solve for the Company WACC?

Answer 1

The Company WACC is 6.1%

Step-by-step explanation:

WACC is the averge cost of capital that a company bears based on the weights of each financing option available to the company.

First we need to calculate the Market values

Debt = $50 M x $1,050 / $1,000 = $52.5 M

Common Equity = $30 M

Preferred equity = $20 M x $90 / $100 = $18 M

Total Capital = $52.5 M + $30 M + $18 M = $100.5

Now we need to calculte the Cost of each financing option

Cost of Debt

Price of Bond = C x ( 1 - ( 1 + YTM )^-n / r + Face value / ( 1 + YTM )^n

$1,050 = $60 x ( 1 - ( 1 + YTM )^-5 / YTM + $1,000 / ( 1 + YTM )^5

YTM = 4.85%

Cost of Common Equity = 12%

Cost of Preseferred Stock = $5 / $90 = 0.05556 = 5.56%

Now use following fomula to calculte the WACC

WACC = ( Common Equity weight x Cost of Common equity ) + ( Weight of Debt x Cost of Debt x ( 1 - Tax rate ) + ( Weight of Preferred Shares x Cost of Preferred Shares )

Now Place all the valus in the formula

WACC = ( $30 / $100.5 x 12% ) + ( $52.5 / $100.5 x ( 1 - 40% ) x 4.85% ) + ( $18 / $100.5 x 5.56% )

WACC = 3.58% + 1.52% + 1.00% = 6.1%