suppose the most recent dividend was $5.30 and the dividend growth rate was 5%. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. both bonds make semi-annual payments. The tax rate is 35%. what is the company's WACC.
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Erna Corp. has 9 million shares of common stock outstanding. The current share price is $81, and the book value per share is $8. Erna Corp. also has two bond issues outstanding. The first bond issue has a face value of $80 million, has a coupon of 10 percent, and sells for 96 percent of par. The second issue has a face value of $50 million, has a coupon of 11 percent, and sells for 104 percent of par. The first issue matures in 25 years, the second in 8 years. suppose the most recent dividend was $5.30 and the |
To calculate the WACC, we need to determine the weight of equity and the weight of debt.
Weight of Equity: Number of outstanding shares * price per share = 9 million * $81 = $729 million
Weight of equity = market value of equity / (market value of equity + market value of debt) Weight of equity
= $729 million / ($729 million + $80 million*0.96 + $50 million*1.04)
Weight of equity = 0.85
Weight of Debt: Market value of first bond issue = $80 million * 0.96 = $76.8 million
Market value of second bond issue = $50 million * 1.04 = $52 million
Total market value of debt = $76.8 million + $52 million = $128.8 million
Weight of debt = market value of debt / (market value of equity + market value of debt)
Weight of debt = $128.8 million / ($729 million + $128.8 million)
Weight of debt = 0.15
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