Find the WACC Inc which only issues bond and common stock co

Find the WACC

Inc, which only issues bond and common stock.

common stock currently sells for a price of $25 per share, ithas 2.25 billion shares and the cost of equity is 16%. The firm’s bonds have a face value of $30 billion and sell at a price of 112.5% of face value. The yield to maturity on the bonds is 10%, and the firms tax rate is 35% (Hint: calculate the market value of common stock and the market value of the bonds first.)

Solution

Market value of common stock = 25 * 2.25 billion = 56.25 $ billion

Market value of bonds = 112.5% * $30 billion = 33.75 $ billion

Particular. Amount weights(w) Cost(c) W*C

Common stock. 56.25. 0.625 16%. 10%

Bonds. 33.75. 0.375. 10(1-0.35) = 6.5%. 2.4375%

Total. 90 Wacc. = 12.4375%