Question

Fina, inc’s assets are $500 million, financial through bank loans, bonds, preferred stocks and common stocks. the amounts are as follows:

Bank Loans: $100 million borrowed at 9%

Bonds: $180 million, paying 9% coupon with semi annual payments , andmaturity of 5 years. FINA sold As $1,000Par-Value bonds for $940 and had to incur $40 flotation cost per bond .

PreferredStocks: $20 million , paying $15 dividends per share For $210 and had to incur $10/share flotation costs

Common Stocks $200 million, the bete of FINA stocks is 1.2, the 90 day treasury yiekd is 1%, return market portfolio is 12%

if FINA is subject to 40% tax rate what is the WACC for FINA?

Answer 1

Nper = 5 * 2 = 10
PMT = 1000 * 9%/2 = 45
PV = 940 - 40 = 900
FV = 1000
t = 0.40

After tax cost of debt can be calculated using the following excel formula:
=RATE(nper,pmt,pv,fv)*2*(1-t)
=RATE(10,45,-900,1000)*2*(1-0.40)
= 7.02%

Cost of preferred stock = Dividend/ Price after flotation
= 15/(210-10)
= 7.5%

Cost of equity = Rf+ Beta*(Rm-Rf)
= 1% + 1.2*(12% - 1%)
= 14.2%

WACC = Sum of (weight * cost of capital)
= (9% * 100/500) + (7.02 * 180/500) + (7.5% * 20/500) + (14.2% * 200/500)

= 1.8% + 2.53% + 0.30% + 5.68

= 10.31%

WACC = 10.31% (Rounded to two decimal places)

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