Example 1 WACC Equity Information 50 million shares $80 per share Beta = 1.15 Market risk premium = 9% Risk-free rate = 5%

Debt Information $1 billion in outstanding debt (face value) Current quote = 110 Coupon rate = 9%, semiannual coupons 15 years to maturity Tax rate = 40%

LO3 14-47 Example 1 WACC continued What is the cost of equity? R E = 5 + 1.15(9) = 15.35%

What is the cost of debt? N = 30; PV = -1100; PMT = 45; FV = 1000; CPT I/Y = 3.9268 R D = 3.927(2) = 7.854% *******

What is the after-tax cost of debt? R D(1-T C) = 7.854(1-.4) = 4.712% LO3 14-48

Example 1 WACC continued

What are the capital structure weights? E = 50 million (80) = 4 billion D = 1 billion (1.10) = 1.1 billion V = 4 + 1.1 = 5.1 billion w E = E/V = 4 / 5.1 = 0.7843 w D = D/V = 1.1 / 5.1 = 0.2157 What is the WACC? WACC = 0.7843(15.35%) + 0.2157(4.712%) = 13.06%

******Can someone please explain to me how they calculated cost of debt here?