Animal Chin! is a well-established company. Because of its market share and a fairly stable revenue stream, 1 years ago they successfully issued 25-year maturity 8% bonds, paying semiannually. Today, these bonds are selling for 96% of their face value. The total face value of these bonds is $3.2 billion. The company also issued 9% convertible bonds, paying semiannually, trading at 103% of their face value, maturing in 15 years. The total face value of these bonds is $3 billion. Finally, they just received a $2.5 billion term loan from a bank, the bank is currently charging a 7% interest on the loan. Animal Chin is publicly-traded. Today, its common stock trades for $32 per share. There are .9 billion shares outstanding. Its preferred stock is trading at $19 and just paid a dividend of $1.9. There are .4 billion preferred shares outstanding. The five financial analysts currently covering the company expect Animal Chin to grow at a similar pace as the whole skateboarding sector: about 8%. The last dividend paid on common stock was $3.2 per share. The company’s most recent estimated beta is 1.3. The risk-free rate is 5% and the expected market risk premium 9%.

For the Veloce project the company’s CFO has decided to apply an adjustment factor of 2.8% to the company’s WACC to account for additional risk.

Calculate Animal Chin’s cost of all debt and the after-tax cost of debt.

25 year maturity, 8% bonds, paid semiannually (issued 1 year ago)

N = (25-1) x 2

N = 48

PMT = .08/2 x 3.2 billion FV

128000000

3.2 billion FV

PV = .96(3.2 billion)

3,072,000,000

CPT I/Y = .4.1949

YTM = I/Y x 2

8.3898%

Cost of debt = 8.3898%

After tax cost of debt = 8.3898% (1- .40) = 5.0339%

Convertible Bonds: 15 years to maturity, paid semiannually

N=15*2 = 30

FV = 3 billion

PV = 1.03 x 3 billion = 3.09 billion

PMT = .09/2 x 3 billion FV

CPT I/Y = 4.3197

PTM = I/Y x 2

8.6394%

Cost of debt =

After tax cost of debt =

2.5 million term loan - 7% interest rate

2.5 million x .07 = pre-tax cost of loan per year = 175,000

After tax interest rate = 7 (1-.40) = 4.2%

True annual cost of debt = 4.2 x 2.5 million = 10,050,000

2. Calculate Animal Chin’s average cost of equity.

Cost of Equity = Rf+(Beta*Market risk premium

5+(1.3*9) = 16.7%

3. Calculate Animal Chin’s cost of preferred.

Cost of preferred stock = Div/Share price

1.9/19 = 10%

4. Calculate the market value of debt, equity, preferred, and the company’s total market value.

25-year coupon bond = 96% of $3.2 billion = $3.072 billion

9% convertible bond = 103% of $3 billion = $3.09 billion

Bank loan = 2.5 billon

preferred shares = 0.4 billion shares *$19 per share = $7.6 billion

equity = 0.9 billion shares * $32 per share = $28.80 billion

Total market value of company = 3.072+3.09+2.5+7.6+28.8= $45.062 billion

5.    Calculate the WACC.