Chapter 13, Problem 11QAP

Summary Introduction

Adequate information:

Bonds outstanding $\left(\text{BO}\right)$ = 17,000

Common stock outstanding $\left(\text{SO}\right)$ = 425,000

Beta of the stock $\left(\text{β}\right)$ = 0.88

Current price per share $\left({\text{P}}_{\text{S}}\right)$ = $67

Coupon rate of Bond $\left({\text{CR}}_{\text{B}}\right)$ = 6.80%

Face value of Bond $\left({\text{FV}}_{\text{B}}\right)$ = $2,000

Selling rate of Bond $\left({\text{R}}_{\text{B}}\right)$ = 105%

Price of Bond $\left({\text{PV}}_{\text{B}}\right)$ = $2,100

Term duration of Bond $\left({\text{T}}_{\text{B}}\right)$ = 20 years

Number of compounding periods in a year $\left({\text{N}}_{\text{B}}\right)$ = 2

Risk-free rate $\left({\text{R}}_{\text{f}}\right)$ = 3.5%

Market risk premium $\left({\text{R}}_{\text{M}}\right)$ = 7%

Tax rate $\left(\text{t}\right)$ = 21%

To compute: WACC for company H.

Introduction: The Weighted average cost of capital (WACC) refers to the cost of capital from various sources such as common stocks, preferred stocks, bonds, etc.