Part I. Weighted Average Cost of Capital (WACC). [50 points]

Estimate the weighted average cost of capital of the following firm. The simplified balance sheet is found below (all figures are in $ thousands):

Simplified Balance Sheet
Assets	132,500		Liabilities
			Current Liab	7,500
			Long-term Liab
			Bonds	50,000
				57,500
			Equity
			Par	5,000
			Paid in Capital	12,500
			Retained Earnings	57,500
				75,000
			Liab & Equity	132,500

The bond issue is publicly traded. It has a coupon interest rate of 6.46%, matures in 10 years, and its price is currently listed at 118.53 (which means 118.53% of par). Par value is $1,000 and pays interest semi-annually (even though the listed interest rate is an annual rate).

Stock of this firm is publicly traded, with a beta of 0.75. The stock will pay a dividend of $1.00 per share next year. That dividend is expected to grow at 3% per year indefinitely. The par value of the stock is $5.00 per share. We will assume a risk-free rate (r_F) of 3.5%, and a market return of (r_M) of 10.00%.

At the end of this Assignment (Part I) you should show show a similar Table to Table 9.1 in page 345 of the textbook. Notice that there is not Preferred Equity, hence, only Long-term debt and Common equity are to be used.

Table 9.1	Calculation of the Weighted Average Cost of Capital for Duchess Corporation
Source of capital	Weight (1)	Cost (2)	Weighted cost [(1) x (2)]/(3)
Long-term debt	0.40	5.6%	2.2%
Preferred stock	0.10	10.6%	1.1
Common stock equity	0.50	13.0	6.5
Totals	1.00		WACC = 9.8%

Estimate the Weighted Average Cost of Capital

These parts will walk you through the process of estimating the WACC:

a. (10 points) Find the market debt rate for bonds (r_D = YTM). [When in doubt, review how to calculate YTM either from chapter 6 in the textbook, or from the lecture videos at the end of chapter 6 content.]

b. (10 points) Find the market value of bonds issue [that means a number for the market value of all bonds outstanding].

c. (5 points) Find the after-tax cost of debt (r_i) based on part c) and a tax rate of 34%. [I am looking for only one number here]. Remember After-tax cost of debt = YTM * (1-T)

d. (5 points) Find the required return to the stockholder using the Capital Asset Pricing Model.

e. (5 points)Find the current stock price using the Gordon Constant Growth Model. Note: You already have growth, Dividend payment, and the required rate of return from d).

f. (5 points) Find the market value of all equity (hint use the balance sheet and the par value of the equity to figure the number of shares).

g. (10 points) Finally, use your inputs for market value of debt and market value of equity, as well as their component costs to estimate the weighted average cost of capital.