Activity Instructions

Please answer the following questions based on the scenario below and be sure to show your work. The assignment has a single question worth 90 points.

Dragon Companys assets are $750 million, financed through bank loans, bonds, preferred stocks, and common stocks. The amounts are as follows:

Bank loans: $100 million borrowed at 5%.

Bonds: $280 million, paying an 8% coupon with semi-annual payments, and maturity of 10 years. Dragon sold its $1,000 par-value bonds for $970.

Preferred Stocks: $120 million, paying $15 dividends per share. Dragon sold its preferred shares for $220.

Common Stocks: $250 million, beta is 3.20, the risk-free rate is 5%, and the market rate is 10%.

If Dragon is subject to 30% tax rate, what is the WACC for Dragon? Ignore the flotation costs.

Tips for Success

Steps to calculate the WACC:

• Calculate the proportion of each security. For example, proportion of loans is 100/750.
• Determine the cost of capital of each security.
• Finally, calculate the WACC.

WACC = (proportion of debt X after-tax cost of debt) + (proportion of equity X cost of equity).