Final

Debt: 5,000 4% bonds with twelve years to maturity. The bonds sell for $1090 and the bonds make semi-annual payments

Equity: 100,000 shares outstanding selling for $50 per share. The beta is 2.3. The last dividend paid was $3.10 and the company intends to grow dividends at 5% per year.

Market: There is a 6% market risk premium.

The corporate tax rate is 35%

a) Given the above information, calculate the firm’s WACC

1)

MVD = 5000*1090 = 5.45m => 0.5215

MVE = 100,000*50 = 5.0m => 0.4785

Total MV = 10.45m

2) Cost of debt:

N=24

PV= -1090

FV=1000

PMT=20

I=1.548*2 =3.096

After tax cost of debt – 3.096%(1-0.35) =2.0124

Cost of equity:

R=D1/P0 + g

3.255/50 + 0.05 = 0.1151

WACC = wdrd(1-T) + wcers

= 0.5215(.020124) + .4785(.1151)

=.06557

= 6.56%