Question 3 (20 marks)

After flawlessly answering the previous questions you have been fast tracked for another promotion. You truly are a superstar with the company. All your hard work while attending Yorkville University is paying off.

You now report directly to the CFO and he wants you to find the WACC for the company.

Tata Steel is looking to find its weighted average cost of capital to use in evaluating upcoming investments. The target debt to equity ratio for the company is 50%, with a tax rate of only 40%.

Tata Steel currently has 20year bonds that it has issued 7 years ago. The bonds have a 9% coupon and are currently selling for 108 percent of its face value.

Tata Steel also has a beta of .90 and many analysts are forecasting a market risk premium to be 7%. Government T-bills are currently yielding 8%.

Furthermore, Tata Steel just issued a dividend of $1.80 per share and the CFO provided guidance to the markets that this dividend was expected to grow at 7% indefinitely. The stock price is currently trading at $25 per share.