Question
Your firm is financed with debt and common equity. Debt is comprised of a single issue of 2,000 bonds that are currently trading at a
Your firm is financed with debt and common equity. Debt is comprised of a single issue of 2,000 bonds that are currently trading at a price of $885 each. The bonds were issued exactly two years ago today, each with a par value of $1,000, a coupon rate of 4%, and total maturity of 30 years. Interest coupons are paid on a semi-annual basis. For common equity, there are currently 123,000 shares outstanding, trading at a price of $41.50 each. Dividends are paid on an annual basis, and the last dividend paid was $1.70 per share. Dividends are expected to grow at a rate of 4% for the foreseeable future. You have chosen to use an historical market risk premium estimate of 6%. It is your firms policy to use the current yield of 1.09% on 5-year T-bonds as your proxy for the nominal risk-free rate of return. Finally, you believe the estimated levered equity beta of your firm is 1.82.
You determine that the current market value of your firms capital structure approximates the target capital structure and that the risk of the project under consideration is comparable to the overall risk level of the firms existing asset mix. In addition, if there is more than one way to estimate a variable, it is your firms policy to use the average of the estimations.
Assume that your firms marginal tax rate is 20%.
Estimate the weighted average cost of capital (WACC) for analyzing the decision to replace the old piece of equipment with the new one under consideration.
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