Bonaime, Inc., has 7.4 million shares of common stock outstanding. The current share price is $62.40, and the book value per share is $5.40. The company also has two bond issues outstanding. The first bond issue has a face value of $71.4 million, a coupon rate of 7.4 percent, and sells for 91 percent of par. The second issue has a face value of $36.4 million, a coupon rate of 7.9 percent, and sells for 90 percent of par. The first issue matures in 18 years, the second in 10 years. The most recent dividend was $3.55 and the dividend growth rate is 5 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 40 percent.

The missing requirement is found below:

What is the company’s cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Cost of equity % is 10.97%

What is the company’s aftertax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Aftertax cost of debt %  is 5.24%

What is the company’s equity weight? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.)

Equity weight  is 0.83

What is the company’s weight of debt? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.)

Debt weight  is 0.17

What is the company’s WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

WACC % is 10.00%

Explanation:

share price =Do*(1+g)/r-g

g is the dividend growth rate of 5 %

Do is the dividend just paid $3.55

share price is $62.40

r is the cost of equity that is unknown

r=Do*(1+g)/share price+g

r=3.55*(1+5%)/62.40+5%

r=(3.7275 /62.40)+5%

r=10.97%

First debt:

=rate(nper,pmt,-pv,fv)

nper is the number of coupon interest the bond would pay 18*2=36

pmt is the semi-annual coupon interest=$1000*7.4%/2=$37

pv is the current price of the bond which is 91%*$1000=$910

fv is the face value of $1000

=rate(36,37,-910,1000)

rate=4.19%  (semi-annually)

rate=8.38%(annually)

Second debt:

=rate(nper,pmt,-pv,fv)

nper is the number of coupon interest the bond would pay 10*2=20

pmt is the semi-annual coupon interest=$1000*7.9%/2=$39.5

pv is the current price of the bond which is 90%*$1000=$900

fv is the face value of $1000

=rate(20,39.5,-900,1000)

rate=4.73%  (semi-annually)

rate=9.46%(annually)

Weights:

Debt 1 91%*$71,400,000 i.e $64,974,000.00  

Debt 2 90%*$36,400,000 i,e $32,760,000.00  

Total debt                                 $ 97,734,000.00

Equity 7,400,000*62.4=         $461,760,000.00  

Total capital                              $559,494,000.00  

debt weight $ 97,734,000.00/$559,494,000.00  =0.17

equity weight  $461,760,000.00/ $559,494,000.00 =0.83

Cost of debt=8.38%*$64,974,000.00/$ 97,734,000.00 =5.57%

                     =9.46* $32,760,000.00/$ 97,734,000.00 =3.17%

cost of debt=8.74%

After tax cost of debt =pretax tax cost *(1-t)

t  is tax rate at 40% 0r 0.40

after tax cost of debt=8.74%*(1-0.40)=5.24%

WACC=Ke*equity weight+Kd(after tax)*debt weight

WACC=(10.97%*0.83)+(5.24%*0.17)=10.00%

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