Beruflich Dokumente
Kultur Dokumente
Numerical Example :
Bonds $ 200,000
Common shares $ 200,000
Retained Earnings $ 100,000
-------------
$ 500,000
=========
Bonds:
• Annual interest rate 6%
• Years to maturity is 9 years
Common shares:
• Shares held 100,000
• Current share price $5
• Market return over next year 12%
• Beta (somewhat risky) 1.15
• Treasury bills currently yield 4%
• Bonds:
FV = $200,000
Interest per year = $200,000 x 0.06 = $12,000
N (number of years) = 9
i (interest rate) = 6%
PV (present value of the bonds)
S
P = ----------
(1+rt)
$ 200,000
P = -------------
[1 + (0.06)9]
$ 200,000
P = --------------
1.54
P = $129,870.12
• Common Shares:
100,000 shares x $ 5 = $ 500,000
(should always be 1)
• Bonds:
PV = $ 129,870
FV = $ 200,000
i (after tax) = $ 12,000 (1 – 0.25)
= $ 12,000 x 0.75
= $ 9,000
Effective rate = $ 9,000/$ 200,000 = 0.045 or 4.5%
2.
In order to calculate a weighted average cost of capital there are a few pieces of
information that we need to know:
TheWd= The proportion of the financing taken on by debt (amount of capital taken
from loans/initial investment)
The Wpfd= The proportion of the financing taken provided by preferred stock (amount
of capital taken from preferred stock/initial investment)
The We= The proportion of the financing provided by equity (amount of capital raised
by new equity/initial investment)
The after tax Kd= The cost of debt x ( 1- tax rate) or the interest rate that the bank
requires
Wd(Kd)(1-t)+(Wpfd)(Kpfd) +(We)(Ke)
Here is a numerical example: We want to start a company that requires an initial
investment of $100,000. Our company that will manufacutre plastic shower caddies will
require use of all $100,000. We are able to take out a loan of $25,000 from a local bank;
$50,000 by issuing common stock to family, friends, and professors; and $25,000 of
preferred stock to a generous alumna of MHC. There is an 8% interest rate on our
loan; and we agreed to pay our alumna 6% return. We do some research and see that a
company who only manufactures plastic shower caddies has a beta of .85 with no
outstanding debt. Our risk free rate is 4.4% and market risk premium is 6.6%. The tax
rate is 30%. What is our required return on our investment that we will use to find a
present value of our company, in other words, our WACC?
SOLUTION:
We= 50,000/100,000 = .5
Kd= .08
Kpfd= .06
WACC= (.25)(.08)(1-.3)+(.5)(.1)+(.25)(.06)
WACC= .014+.05+.015
= .079
= 7.9%