The Flying Dove has 1,200 bonds outstanding with a $1,000 par value,a 7 percent coupon,12 years to maturity,semiannual interest payments,and a market price equal to 102 percent of par.The firm also has 47,000 shares of common stock outstanding at a price per share of $38 and a beta of 1.3.The risk-free rate is 4 percent,the market risk premium is 7 percent,and the tax rate is 34 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 = 1,200 × $1,000 × 1.02 = $1,224,000MV_Equity = 47,000 × $38 = $1,786,000MV_{D + E} = $1,224,000 + 1,786,000 = $3,010,000R_S = .04 + 1.3 × .07 = .131,or 13.10%Bond value = ($1,000 × 1.02)= [(.07 × $1,000)/2]({1 - 1/[1 + (R_B/2)]^{(12 × 2)}}/(R_B/2))+ $1,000/[1 + (R_B/2)]^{(12 × 2)}Using a financial calculator,R_B = 6.75%WACC = ($1,786,000/$3,010,000)× .1310 + ($1,224,000/$3,010,000)× .0675 × (1 - .34)= .0958,or 9.58%

The Flying Dove Has 1,200 Bonds Outstanding with a $1,000