Change all % to decimals This question applies to all parts below Company A currently has a stock price $20/per share, with outstanding shares 2 Mil shares

Answer to Part 1:

Face Value = $1,000
Current Price = $886

Annual Coupon Rate = 7.00%
Annual Coupon = 7.00% * $1,000
Annual Coupon = $70

Time to Maturity = 10 years

Let Annual YTM be i%

$886 = $70 * PVIFA(i%, 10) + $1,000 * PVIF(i%, 10)

Using financial calculator:
N = 10
PV = -886
PMT = 70
FV = 1000

I = 8.76%

Annual YTM = 8.76%

Before-tax Cost of Debt = Annual YTM
Before-tax Cost of Debt = 8.76% or 0.0876

Answer to Part 2:

After-tax Cost of Debt = Before-tax Cost of Debt * (1 - Tax Rate)
After-tax Cost of Debt = 8.76% * (1 - 0.30)
After-tax Cost of Debt = 6.13% or 0.0613

Answer to Part 3:

Number of Shares = 2,000,000
Current Price = $20

Market Value of Equity = Number of Shares * Current Price
Market Value of Equity = 2,000,000 * $20
Market Value of Equity = $40,000,000

Answer to Part 4:

Cost of Equity = Risk-free Rate + Beta * (Market Return - Risk-free Rate)
Cost of Equity = 4.00% + 1.20 * (9.00% - 4.00%)
Cost of Equity = 4.00% + 1.20 * 5.00%
Cost of Equity = 10.00% or 0.1000

Answer to Part 5:

Market Value of Debt = Face Value of Debt * Market Quote
Market Value of Debt = $20,000,000 * ($886/$1,000)
Market Value of Debt = $17,720,000

Market Value of Firm = Market Value of Debt + Market Value of Equity
Market Value of Firm = $17,720,000 + $40,000,000
Market Value of Firm = $57,720,000

Weight of Debt = Market Value of Debt / Market Value of Firm
Weight of Debt = $17,720,000 / $57,720,000
Weight of Debt = 0.3070

Answer to Part 6:

Weight of Equity = Market Value of Equity / Market Value of Firm
Weight of Equity = $40,000,000 / $57,720,000
Weight of Equity = 0.6930

WACC = Weight of Debt * After-tax Cost of Debt + Weight of Equity * Cost of Equity
WACC = 0.3070 * 6.13% + 0.6930 * 10.00%
WACC = 8.81% or 0.0881