Carter is estimating its WACC. The company has collected the following

QUESTION

Carter is estimating its WACC. The company has collected the following information. 1. Its capital structure consists of 40 percent debt and 60 percent common equity. 2. The company has 20-year bonds outstanding with a 9 percent annual coupon that are trading at par. 3. The companys tax rate is 40
Using formulas in Chap9 of Funda of Fina Mgt by Brigham&Houston, we get WACC=wd*kd(1-T) wp*kp wc*ks. Here there is no preferd stock. Sokp=0 wd=40% debt = 0.4 wc= 60% equity = 0.6 ks=krf

km-krf)beta = 5.5 5*1.4=5.5 7=12.7% Cost of Debt = kd(1-T) = 9(1-40%)= 9*0.6=5.4% So WACC = 0.4*5.4 0.6*12.7 = 2.16 7.62 = 9.78%

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