Johnny Cake Ltd. has 10 million shares of stock outstanding selling at $20 per share and an issue of $50 million in 8%, annual coupon bonds with a maturity of 13 years, selling at 93.5% of par ($1000). If Johnny Cake's weighted average tax rate is 34%, its next dividend is expected to be $2.00 per share, and all future dividends are expected to grow at 5% per year, indefinitely, what is its WACC

Explanation:

Face value of debt = $50 million

market value = 50 x .935 = 46.75 million

year to maturity = 13 years

coupon rate = 8 %

ytm from table = 8.862 %

tax rate = 34 %

cost after tax = 8.862 ( 1 - .34 ) = 5.848

Equity :---

market value = 10 x 20 = $200 million

market rate = $20

dividend expected = $ 2 per share

growth = 5 %

let cost of equity = x ( let )

20 = 2 / (x - .05 )

20 x - 1 = 2

20 x = 3

x = .15

cost of equity = 15 %

debt = $46.75

equity = $200

percent of debt = 18.94 %

percent of equity = 81.06 %

WACC = 5.848  x .1894 + 15 x .8106

= 13.26 %