Golden Eagle has 1,500 bonds outstanding with a $1,000 par value,a 5 percent coupon,14 years to maturity,semiannual interest payments,and a market price equal to 98 percent of par.The firm also has 50,000 shares of common stock outstanding at a price per share of $43 and a beta of 1.1.The risk-free rate is 3 percent,the market risk premium is 7.5 percent,and the tax rate is 35 percent.What is the firm's WACC? (When computing WACC,round your cost of debt to 4 decimal places when expressed as a decimal value. )

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Quizplus · Accepted Answer

MV_Debt = 1,500 × $1,000 × .98 = $1,470,000MV_Equity = 50,000 × $43 = $2,150,000MV_{D + E} = $1,470,000 + 2,150,000 = $3,620,000R_S = .03 + 1.1 × .075 = .1125,or 11.25%Bond value = ($1,000 × .98)= [(.05 × $1,000)/2]({1 - 1/[1 + (R_B/2)]^{(14 × 2)}}/(R_B/2))+ $1,000/[1 + (R_B/2)]^{(14 × 2)}Using a financial calculator,R_B = 5.20%WACC = ($2,150,000/$3,620,000)× .1125 + ($1,470,000/$3,620,000)× .0520 × (1 - .35)= .0805,or 8.05%

Golden Eagle Has 1,500 Bonds Outstanding with a $1,000 Par