Question

Please help with b. and c.

If Wild Widgets, Inc., were an all-equity company, it would have a beta of .90. The company has a target debt-equity ratio of .60. The expected return on the market portfolio is 11 percent and Treasury bills currently yield 3.3 percent. The company has one bond issue outstanding that matures in 26 years, a par value of $2,000, and a coupon rate of 6 percent. The bond currently sells for $2,130. The corporate tax rate is 24 percent. a. What is the company's cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the company's cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What is the company's weighted average cost of capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g.. 32.16.) a. b. Cost of debt Cost of equity WACC 5.52 13.39 7.64 X % % %

Answer 1

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ke - Microsoft Excel (Product Activation Failed) Add-Ins File Home Insert Page Layout Formulas Data Review View - 2x % Cut Insert Delete Format Σ AutoSum : A Fill Sort & Clear Filter Editing Find & Select Cells MY MZ NA 60 142 Calibri -11AA = = = Dr Wrap Text General E Copy Paste BI U D- DA SF Merge Merge & Center - Center Format Painter $ % % , 4:0 .00 :.: Conditional Format Cell Formatting as Table Styles Clipboard Font Alignment Number Styles MV140 - for L MO MPMQ MR MS MT MU MU MW MX 137 138 PAR VALUE 2000 139 COUPON RATE 6.0% 140 COUPON ($) 141 YEARS 26 NO OF PERIODS 52 143 PRICE 2130 144 YTM (SEMI ANNUAL) 2.7630% (=RATE(MS142,-MS140, MS143,-MS138)] YTM (ANNUAL) 5.5259% 146 147 COST OF DEBT = kd = 5.53% 148 149 unlevered beta = 0.9 150 debt equity ratio = 0.6 151 152 ko = Rf + Beta(Rm-Rf) Rm= 11%, Rf= 3.3% 153 ko = 3.3% +0.9 (11%-3.3%) 154 ko = 0.1023 10.23% = COST OF unlevered EQUITY 145 155 H M Convexity DGM betaport future INDEX INTL CAP BUD SANDRINE LEASING PV, FV, ANNUITY DIR right clean KE CAPM UTILITY, SHARPE, beta ferences: 218 Rea YIELD bond portfolio WACC RO BOJ 130% - 0 _+ 9 * Q ENG 11-12-2019 2. B

- 2x Σ AutoSum : A Fill 2 Sort & m Find & Insert Delete Format Clear Filter Editing Select Cells MY MZ NA KO= ke - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins % Cut Calibri -11AA = = = Dr Wrap Text General E Copy Paste B I U B- A SF Merge Merge & Center - Center $ -% % Format Painter 4:0 .00 . Conditional Format Cell Formatting as Table Styles Clipboard Font Alignment Number Styles MS170 - fx MO MP | ΜΟ MR MS MV MW MX 154 0.1023 10.23% = COST OF unlevered EQUITY 155 156 cost of equity = ke = KO + (ko-kd)*(D/S)*(1-t) 157 10.23% +(10.23% -5.5259%)*(0.60)*(1-0.24) 158 cost of equity = ke = 12.38% 159 160 debt equity ratio = 0.6 161 162 We = 1/(0.6 +1) = 0.625 163 Wd = 0.6/(0.6+1) = 0.375 164 165 WACC = We*ke + Wd*kd*(1-t) 166 WACC = (0.625)*(12.38%) + (0.375)*(5.5259%)*(1-0.24) 167 WACC = 9.31% 168 169 170 171 172 HON Rea convexity DGM betaport future INDEX INTL CAP BUD SANDRINE LEASING PV, FV, ANNUITY DIR right clean KE CAPM UTILITY, SHARPE, beta ferences: 218 YIELD bond portfolio WACC RI O BOJ 130% - 0 _+ 9 * OENG 11-12-2019 2.