WACC

Required Return on stock (Rstock) = Rf + B*(Rm-Rf)

Stock price: PV = Div1 / (r-g) if you have constant growth

WACC = market wt * After-tax debt cost + mkt wt * Reqd Equity Return

of debt of equity

Bond Price/Yield OR Discounting single cash flows: use the TVM Calculator or Sheets or Excel. Show your inputs for credit.

Problem #1

Rf = 3% The market risk premium is 7%, and Company A has a beta of 0.8. It has 1,000,000 shares outstanding that were issued for $7/share. The firms dividend was $2 last year and it is expected to grow at 3%.

The firm has 50,000 bonds outstanding that were issued with a maturity of 10 years, 4 years ago. They were issued at par when rates were 6%. Since then, interest rates have fallen in half. The tax rate is 20%.

A. The firms WACC is ___________

B. Below, show each of the computations for calculating the firms Weighted Average Cost of Capital (WACC)

C. Describe the boundaries, the max, and the min, for what the WACC could theoretically be for this company.

D. Why would the firm not be able to achieve the minimum WACC that would be theoretically possible?