Question

Raymond Mining Corporation has 10.1 million shares of common stock outstanding, 450,000 shares of 5% $100 par value preferred stock outstanding, and 175,000 7.50% semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $49 per share and has a beta of 1.55, the preferred stock currently sells for $98 per share, and the bonds have 15 years to maturity and sell for 116% of par. The market risk premium is 8.9%, T-bills are yielding 4%, and Raymond Mining’s tax is 38%. The YTM before taxes is 5.880%. What is the WACC? (Enter your answers in whole dollars. Omit % sign in your response.)

Answer 1

rate positively ..

	Rate of equity =
		Using CAPM rate of equity = Risk free rate + market risk premium * beta
					=4%+8.9%*1.55
					17.795%
	Rate of debt (after tax)
	we have to use financial calculator to compute YTM
	Put in calcualtor
	PV		-1160
	FV		1000
	PMT	1000*7.5%/2	37.5
	N		30
	Compute I	2.94%
	YTM =		5.88%
	tax rate =		38%
	therefore rate of debt (after tax) =		3.65%
	rate of debt (after tax) =	3.65%
	rate of preferred stock = Annual dividend/Current price
			=5/98
			5.10%
Working for rest of question
Computation of Weight and WACC
			Market value			weight	Cost of capital	weight * cost
	Source
	equity		494900000	=10.1mil*49	66.70%	17.80%	11.87%
	debt		203000000	=175000*1000*116%	27.36%	3.65%	1.00%
	preferred stock	44100000	=450000*98	5.94%	5.10%	0.30%
			742000000					13.17%
WACC=	13%
Ans=	13