# Need help solving a problem involving Weighted Average Cost of Capital (WACC)

Hi everyone. I need help with an assignment for class. I’m try to solve the problem while using a ba ii plus calculator and I’m not sure if I’m doing it correctly.

__Cost of Debt:__

30 year Bonds

Current Price 105.5%

7.6% Coupon Rate

Semi Annual Bond

5 years to Maturity

Tax Rate is 40%

What is the cost of debt?

In the calculator, I put…

N = 10

I/Y = ?

PV = -1055

Pmt = 38

FV = 1,000

For I/Y, got 3.1503 then multiplied it by .2 and got 0.6301. Then multiplied 0.6301 by .6 and got 0.3780.

__Preferred Stock:__

Dividend $7.50

Current Price $60.00

What is the cost of Preferred?

The calculations I did:

7.50/60.00 = 0.1250

__Equity:__

Risk Free Rate 6.50%

Market Risk Premium 6.25%

Stock Beta 0.7

What is the Cost of Equity?

The answer I got for this was 6.33. Not sure if thats correct or not.

Lastly, I need to calculate the WACC (Weighted average cost of capital). Not sure how to do that though.

Thanks

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For your cost of debt you need to tax effect it, so it’s 6.3% x (1-0.4)

Your preferred cost looks right

Your cost of equity is 10.875 which is Re = Rf + beta (MRP) = 6.5 + 0.7 x 6.25

I don’t know what the WACC is here because you haven’t provided the amount of debt, prefereed stock, and equity.

To calculate the weight you do Wd(Re) + Wp(Rp) + We(Re), where the weights equal the proportion of each source to total capital.

So for example if you have $100 of debt and you have $400 of total capital, then your Wd is 0.25.

Hope that helps.

Studying With

Oh I forgot to include the Market Value info:

10,000 Bonds Outstanding Selling @ 105.5% of Par Value

43,000 Preferred Stock @ 60.00

300,000 Shares of Common Stock @ 40.00 per share

Calculations:

I multiplied 10,000 x 1,055 = 10,550,000 (Debt)

then 43,000 x 6,000 = 258,000,000 (Preferred Stock)

Lastly I multiplied 300,000 x 4,000 = 1200000000 (Equity)

I added 10,550,000 + 258,000,000 + 1200000000 and got 1468550000.

After that I divided 10,550,000 by 1468550000 and got 0.0071 (Debt)

I divided 258,000,000 by 1468550000 and got 0.1756 (Preferred Stock)

Lastly, I did 1200000000 by 1468550000 and got 0.8171 (Equity)

WACC Calculations:Then for debt I did: .3780 x 0.71 and got 0.26838

For Preferred Stock I did: .1250 x 17.56 and got 2.195

For Equity I did: 10.8750 x 0.8171 and got 8.8859

For the WACC, I got 11.34928 but I’m not sure if that is correct

Why are you being inconsistent with your decimal places?

Common stock is at 40.00 per share but you’re multiplying it by 4,000 below? Are you paying attention to your numbers at all?

Your output makes no sense because you’re moving decimal places all the time.

Studying With

Honestly I’m not 100 % sure what I’m doing. I thought the correct way was to multiply 10,000 and change the 40.00 to 4,000 to make it easier to multiply. I don’t know if I have to multiply the two market value numbers with the decimal points or without the decimal points. My instructor also instructed me to use four decimal places as well. I was wondering if someone could show me the correct way to compute the market values since I’m so confused on how to do it.

I’m sorry your instructor told you to change it to 4,000 because your instructor is clueless. Keep everything consistent.

10,000 Bonds Outstanding Selling @ 105.5% of Par Value = 10,000 x 1,055 =

10,550,00043,000 Preferred Stock @ 60.00 = 43,000 x 60 =

2,580,000300,000 Shares of Common Stock @ 40.00 per share = 300,000 X 40 =

12,000,000Do you see how reasonable these numbers look now? Divide each by the total sum and you get the weights.