The Flying Dove has 1,600 bonds outstanding with a $1,000 par value,a coupon rate of 5.5 percent,12 years to maturity,annual interest payments,and a market price equal to par.The firm also has 52,000 shares of common stock outstanding at a price per share of $43 and a beta of 1.3.The risk-free rate is 3 percent,the market risk premium is 7 percent,and the tax rate is 35 percent.What is the company's WACC?

Question

Quizplus · Accepted Answer

MV_Debt = 1,600 × $1,000 × 1 = $1,600,000 MV_Equity = 52,000 × $43 = $2,236,000 MV_{D + E} = $1,600,000 + $2,236,000 = $3,836,000 R_S = 0.03 + 1.3(0.07)= 0.121,or 12.1% Since the bonds are selling at par,the yield to maturity equals the coupon rate,so: R_B = 5.5 WACC = ($2,236,000/$3,836,000)(0.121)+ ($1,600,000/$3,836,000)(0.055)(1 − 0.35)= 0.0854,or 8.54%

The Flying Dove Has 1,600 Bonds Outstanding with a $1,000