Question
SBC Inc. is a profitable firm (tax rate of 30 percent) that wants to determine its weighted average cost of capital (WACC). Currently, SBC has
SBC Inc. is a profitable firm (tax rate of 30 percent) that wants to determine its weighted average cost of capital (WACC). Currently, SBC has annual bonds with 8.80 percent coupon rate ($1,000 par) with 18 years to maturity. A bond currently sell for $1302 each. The bonds have a AA rating. The firm has no preferred stock. SBC has common stock (par=$18). SBC beta is 1.3 and the current market risk premium is seven percent while the T-bill return is 4 percent. SBC common stock is currently trading at $28. The stock over bond premium is 4.2 percent. The market value of debt is $360M while the market capitalization is $740M.
a. Find the market value of the firm of the firm
b. Find the weights to be used in the calculation of WACC
c. Find the required return for SBC debt
d. Using the stock over bond approach, find the required return for SBC equity
e. Find the weighted average cost of capital
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