Question: Product has 2,500,000 shares of common stock outstanding
Product has 2,500,000 shares of common stock outstanding. The current share price is $26.54, and the book value per share is $11.27. Amaron also has two bond issues outstanding. The first bond issue has a face value (or book value) of $12,719,000 and a coupon rate of 7.10% and sells for 121.1% of PAR value. The second issue has a face value (or book value) of $4,314,000 and a coupon rate of 6.80% and sells for 116.0% of PAR value. The 7.10% coupon bond matures in 24 years, the 6.80% coupon bond matures in 12 years. Both bonds make semiannual payments. The tax rate is 32%.
Suppose stock has a beta of 1.2. The risk-free rate is 2.25%, and the market risk premium is 12.85%. Assume that the overall cost of debt is the weighted average implied by the two outstanding debt issues.
WHAT IS THE WEIGHTED AVERAGE COST OF CAPITAL (WACC)
| BOND DATA | ||
| 7.1% Coupon | 6.80% Coupon | |
| Face Value for book value | $12,719,000 | $4,314,000 |
| Coupon rate | 7.1% | 6.8% |
| Bond price % of PAR | 121.1% | 116.0% |
| Term to maturity | 24% | 12 |
| Tax rate | 32% | 32% |
| STOCK DATA | |
| # shares outstanding | 2,500,000 |
| Market value per share | $26.54 |
| Book value per share | $11.27 |
| Beta | 1.20 |
| Risk free rate(rPM) | 12.85% |
