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The CFO of Wills Hornets Inc is calculating the WACC of the company
The CFO of Wills Hornets Inc is calculating the WACC of the company. She collects the following facts: • The company's long-term bonds currently offer a yield to maturity of 8%. • The company's stock price is $30.7 per share and recently paid a dividend of $2 per share, which is expected to grow at a constant rate of 6% per year. • The company preference shares currently trade at $40.5 per share and pay a preference dividend of 10% on a par value of $50. • The company's capital structure is 65% common equity, 10% preference shares, and 25% debt. • The company's tax rate is 40%. What is the company's WACC? % (Give answer as % to 2 decimal places) Check
Expert Solution
Calculation of After Tax Cost of Debt :
After-Tax Cost of Debt of the firm = Yield to maturity * (1 - tax rate)
= 8% * (1 - 0.40)
= 4.8%
Calculation of Cost of Equity
Cost of Common Equity = [Expected Dividend / (Market Price - Flotation Cost)] + growth rate
= [(2 * 1.06) / 30.7] + 0.06
= 0.12905537459 or 12.91%
Calculation of Cost of Preferred Stock
Cost of Preferred Stock = Annual Dividend / Current Market Price
= (50 * 10%) / 40.5
= 0.12345679012 or 12.35%
Calculation of WACC of the Firm
WACC = (Cost of After tax Debt * Weight of Debt) + ( Cost of Equity * Weight of Equity) + (Cost of Preferred Stock + Weight of Preferred stock)
= (4.8% * 0.25) + (12.905537459 * 0.65) + (12.345679012 * 0.10)
= 10.823167495 or 10.82%
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