Bruce Wayne Communications has a capital structure that consists of 70 percent common stock and 30 percent long-term debt. In order to calculate Wayne’s weighted average cost of capital (WACC), an analyst has accumulated the following information: The company currently has 10-year bonds outstanding with annual coupon payments of 8 percent. The bonds have a face value of P1,000 and sell for P1,075. The risk-free rate is 5 percent. The market risk premium is 4 percent. The beta on Wayne’s common stock is 1.1. The company’s retained earnings are sufficient so that they do not have to issue any new common stock to fund capital projects. The company’s tax rate is 40 percent. Given this information, what is Wayne’s WACC?
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
10.Bruce Wayne Communications has a capital structure that consists of 70
percent common stock and 30 percent long-term debt. In order to
calculate Wayne’s weighted average cost of capital (WACC), an analyst
has accumulated the following information:
- The company currently has 10-year bonds outstanding with annual
coupon payments of 8 percent. The bonds have a face value of
P1,000 and sell for P1,075. - The risk-free rate is 5 percent.
- The market risk premium is 4 percent.
- The beta on Wayne’s common stock is 1.1. The company’s
retained earnings are sufficient so that they do not
have to issue any new common stock to fund capital projects. - The company’s tax rate is 40 percent.
Given this information, what is Wayne’s WACC?
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 2 images
