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Caspian Sea Drinks' is financed with 70.00% equity and the remainder in debt. They have 12.00-year,...

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Finance

Caspian Sea Drinks' is financed with 70.00% equity and theremainder in debt. They have 12.00-year, semi-annual pay, 5.27%coupon bonds which sell for 98.50% of par. Their stock currentlyhas a market value of $24.14 and Mr. Bensen believes the marketestimates that dividends will grow at 3.26% forever. Next year’sdividend is projected to be $2.29. Assuming a marginal tax rate of29.00%, what is their WACC (weighted average cost of capital)?

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3.8 Ratings (593 Votes)

Weight of equity = 1-D/A
Weight of equity = 1-0.3
W(E)=0.7
Weight of debt = D/A
Weight of debt = 0.3
W(D)=0.3
Cost of equity
As per DDM
Price = Dividend in 1 year/(cost of equity - growth rate)
24.14 = 2.29/ (Cost of equity - 0.0326)
Cost of equity% = 12.75
Cost of debt
                  K = Nx2
Bond Price =? [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2
                   k=1
                  K =12x2
985 =? [(5.27*1000/200)/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^12x2
                   k=1
YTM = 5.4418596104
After tax cost of debt = cost of debt*(1-tax rate)
After tax cost of debt = 5.4418596104*(1-0.29)
= 3.863720323384
WACC=after tax cost of debt*W(D)+cost of equity*W(E)
WACC=3.86*0.3+12.75*0.7
WACC =10.08%

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Transcribed Image Text

Caspian Sea Drinks' is financed with 70.00% equity and theremainder in debt. They have 12.00-year, semi-annual pay, 5.27%coupon bonds which sell for 98.50% of par. Their stock currentlyhas a market value of $24.14 and Mr. Bensen believes the marketestimates that dividends will grow at 3.26% forever. Next year’sdividend is projected to be $2.29. Assuming a marginal tax rate of29.00%, what is their WACC (weighted average cost of capital)?

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