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Homework answers / question archive / Number of equity shares outstanding: 10 million Current stock price per share: $400 Short term debt on balance sheet: $0 Long term debt on balance sheet: $2,000 Equity on balance sheet: $1,500 Number of bonds issued: 20 million Current price for each bond: $90 Coupon Rate of Bonds: 6% Bonds Rating: B (Avg Debt Beta = 0

Number of equity shares outstanding: 10 million Current stock price per share: $400 Short term debt on balance sheet: $0 Long term debt on balance sheet: $2,000 Equity on balance sheet: $1,500 Number of bonds issued: 20 million Current price for each bond: $90 Coupon Rate of Bonds: 6% Bonds Rating: B (Avg Debt Beta = 0

Finance

Number of equity shares outstanding: 10 million

Current stock price per share: $400

Short term debt on balance sheet: $0

Long term debt on balance sheet: $2,000

Equity on balance sheet: $1,500

Number of bonds issued: 20 million

Current price for each bond: $90

Coupon Rate of Bonds: 6%

Bonds Rating: B (Avg Debt Beta = 0.26)

Tax Rate: 35%

Question: The firm has zero excess cash. Suppose the risk-free rate is 2% and expected market return is 6%, then the firm's WACC minus its asset cost of capital equals ___%

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Computation of the WACC:-

Market value of debt = 20 * $90

= $1,800 million

Market value of equity = 10 * $400

= $4,000 million

Total value = $1,800 + $4,000

= $5,800

Weight of debt = Market value of debt / Total value 

= $1,800 / $5,800

= 31.03%

Weight of equity = Market value of equity / total value

= $4,000 / $5,800

= 68.97%

Cost of equity = Risk free rate + Beta * (Expected market return - Risk free rate)

= 2% + 0.26 * (6% - 2%)

= 2% + (0.26 * 4%)

= 2% + 1.04%

= 3.04%

Cost of debt = Coupon rate =6%

WACC = (Weight of debt * Cost of debt * (1 - Tax rate)) + (Weight of equity * Cost of equity)

= (31.03% * 6% * (1 - 35%)) + (68.97% * 3.04%)

= 1.21% + 2.10%

= 3.31%

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