Chapter 13, Problem 17QAP

Summary Introduction

Adequate information:

Bonds I outstanding $\left({\text{BO}}_{\text{I}}\right)$ = 40,000

Coupon rate of Bond I $\left({\text{CR}}_{\text{BI}}\right)$ = 4.90%

Face value of Bond I $\left({\text{FV}}_{\text{BI}}\right)$ = $1,000

Selling rate of Bond I $\left({\text{R}}_{\text{BI}}\right)$ = 106.5%

Price of Bond I $\left({\text{PV}}_{\text{BI}}\right)$ = $1,065

Term duration of Bond I $\left({\text{T}}_{\text{BI}}\right)$ = 15 years

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

Bonds II outstanding $\left({\text{BO}}_{\text{II}}\right)$ = 40,000

Coupon rate of Bond II $\left({\text{CR}}_{\text{BII}}\right)$ = 0%

Face value of Bond II $\left({\text{FV}}_{\text{BII}}\right)$ = $10,000

Selling rate of Bond II $\left({\text{R}}_{\text{BII}}\right)$ = 21.8%

Price of Bond II $\left({\text{PV}}_{\text{BII}}\right)$ = $2,180

Term duration of Bond II $\left({\text{T}}_{\text{BII}}\right)$ = 30 years

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

Common stock outstanding $\left({\text{SO}}_{\text{CS}}\right)$ = 1,900,000

Beta of the stock $\left({\text{β}}_{\text{CS}}\right)$ = 1.15

Current price per share $\left({\text{P}}_{\text{CS}}\right)$ = $73

Preferred stock outstanding $\left({\text{SO}}_{\text{PS}}\right)$ = 135,000

Current rate of preferred stock $\left({\text{CR}}_{\text{PS}}\right)$ = 3.50%

Current price per share $\left({\text{P}}_{\text{PS}}\right)$ = $87

Risk-free rate $\left({\text{R}}_{\text{f}}\right)$ = 3.60%

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

Tax rate $\left(\text{t}\right)$ = 23%

To compute: WACC for the company S.

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.