Calculating WACC

[msfly]

If you have bonds that mature in 20 years, 8% annual coupon, par value $1000 and market price $1075. The tax rate is 40%. The risk-free rate is 4.5% and market risk premium is 5.5% with a beta of 1.20. Target capital is 35% debt with 65% coming from common equity. What is its WACC?

 

[PennyLessFinancier]

WACC Calculation

If you have bonds that mature in 20 years, 8% annual coupon, par value $1000 and market price $1075. The tax rate is 40%. The risk-free rate is 4.5% and market risk premium is 5.5% with a beta of 1.20. Target capital is 35% debt with 65% coming from common equity. What is its WACC?

Assuming the interest are paid twice a year, this online Cost of Debt Calculator reports
Pre Tax: Cost of Debt = 3.64% Annual Cost of Debt = 7.28%
After Tax: Cost of Debt = 2.18% Annual Cost of Debt = 4.36%

Cost of equity = Risk free rate of return + Beta x (market rate of return- risk free rate of return)

Cost of equity = 4.5% + 1.20 x (5.5% - 4.5%)
Cost of equity = 4.5% + 1.20 x (1%)
Cost of equity = 4.5% + 1.20 x (0.01)
Cost of equity = 4.5% + 0.012
Cost of equity = 0.045 + 0.012
Cost of equity = 0.057
Cost of equity = 5.7%

WACC = 35% (4.36%) + 65%(5.7%)
WACC = 0.01526 + 0.03705
WACC = 0.05231
WACC = 5.23%