Calculating Firm's WACC - Class Example Note - Edubirdie

University:
York University
Course:
ADMS 2541 | Introduction to Personal Finance
Academic year:

2021
Views:

223

Pages:

1
Author:

Niklas

A firm has the following specifics: Debt info: Currently has 2,000 zero-coupon bonds issued with a face value of $1,000. The zero-coupon bonds mature 10 years later. The bonds currently trade at $720 today. Use annual compounding Share info: Shareholder's equity: $1,000,000 $10 share price, 150,000 shares outstanding Currently pays out $0.80 dividend, constant growth rate = 2% Tax rate = 21% What is this firm's WACC? [W_{D}=\frac{D}{D+\epsilon}] [W_{E}=\frac{E}{D+E}] [D=2000\times720=1,440,000] [E=10\times150,000=1,500,000] [\frac{1,440,000}{1,440,000+1,500,000}=0.4898] [\frac{1,500,000}{1,440,000+1,500,000}=0.5102] [WACC=0.4898(1-0.21)+0.5102(0.067)] [WACC=0.3879+0.0342] [WACC=0.4221] N = 70 r_D = I/Y = 1.53 * 2 = 3.07% r_E = (D_0(1+g))/P_0 + g = (0.80(1+0.02))/57 + 0.02 = 0.067 FV = 1000 PV = 720 PMT = 0 N = 10

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