A19 X fc Weight on debt = (D/V) = A B D E F G H 1 2 3 WACC = WACC D E x (1 t) * ro + V V = D + E 4 where 5 6 3 pts 3 pts 3 pts Swarm, Inc. needs your help with its WACC!!! They have 9 million shares outstanding, each priced at $52/share. They have 2 bond issues. The first bond has 58,000 bonds outstanding, each is priced at 101% of par, has a 6% coupon, paid semi-annually and matures in 10 years. The second has 82,000 bonds outstanding, each is priced at 99% of par, has a 7% coupon, paid semi-annually and matures in 9 years. 7 8 Suppose that the most recent dividend paid by Swarm was $2.50, and the dividend growth rate is 3.8 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. The tax rate is 25 percent. What is the company's WACC? 9 10 11 Market value equity Market value debt #1 Market value debt #2 12 Price/share Price of ONE bond ($) Price of ONE bond ($) 13 Shares outstanding # of Bonds outstanding # of Bonds outstanding 14 15 Market value equity ("E") = #N/A Market value debt ("D")= #N/A Market value debt ("D")= 16 17 Total capital (D + E) = #N/A 1 18 Weight on equity (E/V) = #N/A 1 19 Weight on debt = (D/V) = #N/A 1 20 LU 5 pts 5 pts 5 pts Bond yield (which is Rp) Debt #2 PMT R = D/P, +g #N/A Re = D/P, +g D1 Po N #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A g PV (price as outflow) FV Rate #N/A #N/A #N/A #N/A Bond YTM (which is Rp) = RE = #N/A 21 Bond yield (which is Rp) Debt #1 22 PMT 23 N 24 PV (price as outflow) 25 FV 26 27 Rate 28 Bond YTM (which is Rp) = 29 30 31 Weighted average Rp : MV Debt 32 Debt #1 MV 33 Debt #2 MV 34 Total debt 35 36 37 Tax rate 38 39 WACC = 40 #N/A 41 Weight Weight x RD #N/A #N/A Weighted average Rd 8 pts 1 WACC = XIE D E x (1 t) x ro + V V V = D + E 1 where 42 A19 X fc Weight on debt = (D/V) = A B D E F G H 1 2 3 WACC = WACC D E x (1 t) * ro + V V = D + E 4 where 5 6 3 pts 3 pts 3 pts Swarm, Inc. needs your help with its WACC!!! They have 9 million shares outstanding, each priced at $52/share. They have 2 bond issues. The first bond has 58,000 bonds outstanding, each is priced at 101% of par, has a 6% coupon, paid semi-annually and matures in 10 years. The second has 82,000 bonds outstanding, each is priced at 99% of par, has a 7% coupon, paid semi-annually and matures in 9 years. 7 8 Suppose that the most recent dividend paid by Swarm was $2.50, and the dividend growth rate is 3.8 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. The tax rate is 25 percent. What is the company's WACC? 9 10 11 Market value equity Market value debt #1 Market value debt #2 12 Price/share Price of ONE bond ($) Price of ONE bond ($) 13 Shares outstanding # of Bonds outstanding # of Bonds outstanding 14 15 Market value equity ("E") = #N/A Market value debt ("D")= #N/A Market value debt ("D")= 16 17 Total capital (D + E) = #N/A 1 18 Weight on equity (E/V) = #N/A 1 19 Weight on debt = (D/V) = #N/A 1 20 LU 5 pts 5 pts 5 pts Bond yield (which is Rp) Debt #2 PMT R = D/P, +g #N/A Re = D/P, +g D1 Po N #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A g PV (price as outflow) FV Rate #N/A #N/A #N/A #N/A Bond YTM (which is Rp) = RE = #N/A 21 Bond yield (which is Rp) Debt #1 22 PMT 23 N 24 PV (price as outflow) 25 FV 26 27 Rate 28 Bond YTM (which is Rp) = 29 30 31 Weighted average Rp : MV Debt 32 Debt #1 MV 33 Debt #2 MV 34 Total debt 35 36 37 Tax rate 38 39 WACC = 40 #N/A 41 Weight Weight x RD #N/A #N/A Weighted average Rd 8 pts 1 WACC = XIE D E x (1 t) x ro + V V V = D + E 1 where 42
