Greene Co. is planning a project for which it will issue new bonds. Bonds in the same risk class and with the same covenants, issued by another firm are currently priced at $954.90, have 25 years remaining to maturity, and pay coupons of $75 yearly, made in semi-annual payments. If Greene's marginal tax rate is 34.50%, it's cost of equity is 8.00% with an equity value of $23,000,000.00, and they have 15,000 bonds with a par value of $1,000.00 what is the WACC of this project? Question 13 options: 15.84% 7.92% 6.92% 8.94%
Question
Greene Co. is planning a project for which it will issue new bonds. Bonds in the same risk class and with the same covenants, issued by another firm are currently priced at 75 yearly, made in semi-annual payments. If Greene's marginal tax rate is 34.50%, it's cost of equity is 8.00% with an equity value of 1,000.00 what is the WACC of this project? Question 13 options:
15.84%
7.92%
6.92%
8.94%
Solution
To calculate the Weighted Average Cost of Capital (WACC), we first need to find the cost of debt and the cost of equity.
- Cost of Debt (Kd):
The cost of debt is the yield to maturity of the bond. Given the bond price, the coupon payments, and the years to maturity, we can calculate the yield to maturity using a financial calculator or an online yield to maturity calculator.
Assuming the yield to maturity is Y%, the after-tax cost of debt would be Kd = Y% * (1 - Tax Rate).
- Cost of Equity (Ke):
The cost of equity is given as 8.00%.
- Weight of Debt (Wd) and Weight of Equity (We):
The weight of debt is the total market value of debt divided by the total market value of the firm. The total market value of debt is the number of bonds times the price of the bond.
The weight of equity is the total market value of equity divided by the total market value of the firm. The total market value of equity is given as $23,000,000.00.
- WACC:
Finally, the WACC is calculated as follows:
WACC = WdKd + WeKe
Without the actual yield to maturity, we cannot calculate the exact WACC. However, given the options, we can infer that the WACC should be less than the cost of equity (8.00%) because the cost of debt is generally less than the cost of equity and it is tax-deductible. Therefore, the WACC should be less than 8.00%.
Among the options, the only one that is less than 8.00% is 6.92%. So, the answer should be 6.92%.
Similar Questions
A firm has $5,000 of debt, $16,000 of equity, a cost of debt of 8 percent, and a cost of equity of 12 percent. What is the firm's WACC if there are no taxes?Multiple choice question.9.85%8.95%11.05%11.75%
If interest is tax-deductible and the marginal tax rate is 30%, the company's WACC is closest to:A.5.51%.B.6.52%.C.7.00%.
An analyst gathers the following information about a company's capital structure:Debt (tax-deductible) 40%Equity 60%Before tax cost of debt 4%Cost of equity 9%If interest is tax-deductible and the marginal tax rate is 30%, the company's WACC is closest to:A.5.51%.B.6.52%.C.7.00%.
Astra Containers is seeking to borrow $45 million at an interest rate of 6 percent. Astra will raise an additional $30 million through equity investment, returning 10 percent. What is the WACC?Select an answer:10.6 percent6 percent7.6 percent8 percent
ROFL Limited has asked you to calculate the debt component to help in its calculation of its weighted average cost of capital (WACC). ROFL has 9,000 Corporate Bonds outstanding with a face value of $37,000 each. The coupon rate is 6% p.a. compounding semi-annually. The bonds mature in 13 years and currently ROFL bonds are trading in the market at a yield of 5%p.a. If a coupon payment was paid today what is the total market value of ROFL’s issued bonds? Provide your answer to the nearest dollar.
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.