WACC example

Equity information Debt information Tax rate 40%# shares outstanding 50 million Face value $1.000 billionShare price 80 Current quote 110Beta 1.15 Coupon rate 9%Market risk premium 9% # coupons / year 2Risk-free rate 5% Maturity 15 years

Cost of equity?Re = Rf + beta * market risk premium 15.3500%

Pre-tax cost of debt? Need the YTM on the firm's bonds:This example shows that instead of using the price of ONE bond and the coupon paid on ONE bond,you can use the MV of ALL the bonds combined and the coupon paid on ALL the bonds combined…

MV of the bonds = BV of the bonds * current quote $1.100 billionCoupon paid on ALL the bonds = (coupon rate / 2) * BV of bonds $0.045 billion

PV $1.100 billionpmt $0.045 billionFV $1.000 billionn 30 semi-annual periods

Semi-annual YTM 3.927%Annual YTM 7.854%

Capital structure weights?E: MVE = # shares outstanding * share price $4.000 billionD: MV of debt $1.100 billion

D+E: MVE + MVD $5.100 billion

WACC?WACC = Re * (E / (D+E)) + Rd * (1-T) * (D / (D+E)) 13.06%