Question

The cost of debt is 3.35% (before tax)

Flotation costs (F) = 7% of issue price

The debt is trading at $1,095.00

There are 7,456 bonds outstanding

The tax rate is .40

D0 = $3.15

g = 3.30%

Beta = 1.78

rRF = 1.57%

RPm = 4.5%

The firm has 200,000 shares of common stock outstanding

Common stock shares are trading at $55.00/share (P0)

Given the above information, what is the Market value of the firm’s debt? $___________________

Given the above information, what is the Market value of the firm’s equity? $___________________

Now calculate the weight of debt for the firm (Wd). You will use this to calculate the WACC.

Now calculate the weight of equity for the firm (Wce). You will use this to calculate the WACC. What is the cost of existing common equity (retained earnings)? (Briefly describe your approach/method as well as your answer) What is the firm’s WACC? (Briefly describe your approach/method as well as your answer)

Answer 1

1) The market value of the firms debt is given by: -

CMP X bonds outstanding i.e. 1095 X 7456 = 81,64,320

2) Market value of firms equity :-

CMP X Shares Outstanding = 55 X 200,000 = 1,10,00,000

3) Total market value of capital = Total market value of debt + total market value of equity

Total cap = 1,91,64,320

Weight of debt : Market value of debt/ Market value of capital

: 81,64,320 / 1,91,64,320 = .4260

4) Weight of equity : 1,10,00,000 / 1,91,64320

= .5739