Chapter 13, Problem 9QAP

Summary Introduction

Adequate information:

Common stock outstanding $\left(\text{SO}\right)$ = 7,600,000

Book value per share $\left({\text{BV}}_{\text{S}}\right)$ = $4

Current price per share $\left({\text{P}}_{\text{S}}\right)$ = $67

Book value of Bond I $\left({\text{BV}}_{\text{BI}}\right)$ = $80,000,000

Coupon rate of Bond I $\left({\text{CR}}_{\text{BI}}\right)$ = 6.80%

Face value of Bond I $\left({\text{FV}}_{\text{BI}}\right)$ = $1,000

Selling rate of Bond I $\left({\text{R}}_{\text{BI}}\right)$ = 109.5%

Price of Bond I $\left({\text{PV}}_{\text{BI}}\right)$ = $1,095

Term duration of Bond I $\left({\text{T}}_{\text{BI}}\right)$ = 9 years

Number of compounding periods in a year $\left({\text{N}}_{\text{BI}}\right)$ = 2

Book value of Bond II $\left({\text{BV}}_{\text{BII}}\right)$ = $65,000,000

Coupon rate of Bond II $\left({\text{BV}}_{\text{BII}}\right)$ = 7.10%

Face value of Bond II $\left({\text{FV}}_{\text{BII}}\right)$ = $1,000

Selling rate of Bond II $\left({\text{R}}_{\text{BII}}\right)$ = 112.4%

Price of Bond II $\left({\text{PV}}_{\text{BII}}\right)$ = $1,124

Term duration of Bond II $\left({\text{T}}_{\text{BII}}\right)$ = 25 years

Number of compounding periods in a year $\left({\text{N}}_{\text{BII}}\right)$ = 2

Beta of the stock $\left(\text{β}\right)$ = 1.10

Risk-free rate $\left({\text{R}}_{\text{f}}\right)$ = 2.9%

Market risk premium $\left({\text{R}}_{\text{M}}\right)$ = 7%

Tax rate $\left(\text{t}\right)$ = 23%

To compute: WACC for company F.

Introduction: The Weighted average cost of capital (WACC) refers to the cost of capital from various sources such as common stocks, preferred stocks, bonds, etc.