WACC COMPUTATION.

WACC COMPUTATION
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COST OF EQUITY
The cost of equity computation can be carried out using the CAPM model.
Cost of Equity = Risk free rate + Beta * Market Risk Premium
In the given case, risk free rate = 3.5%, beta = 1.3, market risk premium = 7%
Hence, cost of equity = 3.5% + 1.3*7% = 12.6%
COST OF DEBT
In the given case, the YTM (Yield to Maturity) needs to be determined for the bonds issued
by the company.
Current price of bond = 97% *1000 = $ 970
Coupon rate = 9%
Par value = $ 1000
The YTM would be the discount rate at which the present value of the future cashflows
would be $ 970. This is estimated using the table below.
Hence, YTM = 9.38%

Post tax cost of debt = 9.38%*(1-0.35) = 6.1%
WEIGHT COMPUTATION
Market value of equity = Current value of one common stock * Common stock outstanding =
50 * 8.2 million = $ 410 million
Market value of debt = Current price of one bond * Outstanding bonds = (97% *1000)*
200,000 = $ 194 million
Weight of equity = (410/(410+194))= 0.6788
Weight of debt = (194/(410+194)) = 0.3212
WACC COMPUTATION
WACC = Weight of equity * Cost of equity + Weight of debt * After tax cost of debt =
0.6788*12.6% + 0.3212 *6.1% = 10.51%