Weighted Average Cost of Capital Exercise

You wish to value ABC Corp and need to calculate its weighted average cost of capital (WACC). You get the most recent 10-K filing and dig into the footnotes to uncover the following items related to ABC?s debt. You look up the current price of each of ABC?s bond using Bloomberg to reveal:

Long-term debt

Long-term debt
Tenor (yr)	Coupon	Principal ($mil)	Price
3	6.00%	150	101.56
5	6.25%	400	102.34
7	8.00%	250	114.36

Exercise 1.

• Using the information above, calculate the yield to maturity on each of ABC?s bonds assuming semi-annual pricing convention.
• Calculate the total amount of long-term debt outstanding by summing the principal on the three bonds.
• Determine the weighted average yield to maturity on ABC?s long-term debt by taking the weight of each bond times its yield (calculated in part A above) and then summing these yields across the three bonds.

Long-term debt
amount	average yield
$800.00	5.47%

Short-term debt

ABC Corp has a $250 million revolving line of credit that is used for working capital needs and general corporate purposes and is considered permanent capital. Currently there is $50 million drawn and this carries an interest rate of Libor + 200 basis points. Assume Libor is 0.50% now.

Exercise 2.

Treat the revolving line of credit as short-term debt and determine the amount and the cost of this funding.

Short-term debt
amount	average yield
$50.00	2.50%

Equity

In 2005, ABC issued 10 million shares at $20 per share and these shares are still outstanding. The current stock price is $145.67 with a risk-free rate of 4%, market risk premium of 6%, and beta of 1.25.

Equity
amount	cost
$1,456.70	11.50%

.

All together now?

WACC = w_dk_d(1-T)+w_stdk_std(1-T)+w_ek_e

Assume a corporate tax rate of 35%

Calculate the total capitalization by adding the amounts from long-term debt, short-term debt, and equity. Determine the weights of each by dividing the individual amount by the total capitalization.

wd	kd	(1-T)	wstd	kstd	(1-T)	we	ke

WACC = _____________

Weighted Average Cost of Capital Exercise You wish to value ABC Corp and need to calculate its weighted average cost of capital (WACC). You get the most recent 10-K filing and dig into the footnotes to uncover the following items related to ABC's debt. You look up the current price of each of ABC's bond using Bloomberg to reveal: Long-term debt Tenor (yr) 3 5 7 Long-term debt Coupon Principal ($mil) 6.00% 150 6.25% 400 8.00% 250 Price 101.56 102.34 114.36 Exercise 1. A. Using the information above, calculate the yield to maturity on each of ABC's bonds assuming semi-annual pricing convention. B. Calculate the total amount of long-term debt outstanding by summing the principal on the three bonds. C. Determine the weighted average yield to maturity on ABC's long-term debt by taking the weight of each bond times its yield (calculated in part A above) and then summing these yields across the three bonds. Long-term debt amount average yield $800.00 5.47% Short-term debt ABC Corp has a $250 million revolving line of credit that is used for working capital needs and general corporate purposes and is considered permanent capital. Currently there is $50 million drawn and this carries an interest rate of Libor + 200 basis points. Assume Libor is 0.50% now. Exercise 2. Treat the revolving line of credit as short-term debt and determine the amount and the cost of this funding. Short-term debt amount average yield $50.00 2.50% Equity In 2005, ABC issued 10 million shares at $20 per share and these shares are still outstanding. The current stock price is $145.67 with a risk-free rate of 4%, market risk premium of 6%, and beta of 1.25. Equity amount cost $1,456.70 11.50% . All together now... WACC = wdkd(1-T)+wstdkstd(1-T)+weke Assume a corporate tax rate of 35% Calculate the total capitalization by adding the amounts from long-term debt, short-term debt, and equity. Determine the weights of each by dividing the individual amount by the total capitalization. wd kd (1-T) WACC = _____________ wstd kstd (1-T) we ke