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  • 2010-03-15 190142 Fuerst Coal

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    Fuerst Cola has $10 million in bonds with a coupon rate of 10% and $16 million in stock. The after-tax cost of debt is 5.53% and the after-tax cost of equity is 12.09%. Using a tax rate of 40%, risk-free rate of 6%, and market rate of 14%, the weighted average cost of capital (WACC) is calculated to be 12.09%.

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    2010-03-15_190142_Fuerst_Coal

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    Fuerst Cola has $10 million in bonds with a coupon rate of 10% and $16 million in stock. The after-tax cost of debt is 5.53% and the after-tax cost of equity is 12.09%. Using a tax rate of 40%, risk-free rate of 6%, and market rate of 14%, the weighted average cost of capital (WACC) is calculated to be 12.09%.

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    7 views1 page

    2010-03-15 190142 Fuerst Coal

    Uploaded by

    qamar
    Fuerst Cola has $10 million in bonds with a coupon rate of 10% and $16 million in stock. The after-tax cost of debt is 5.53% and the after-tax cost of equity is 12.09%. Using a tax rate of 40%, risk-free rate of 6%, and market rate of 14%, the weighted average cost of capital (WACC) is calculated to be 12.09%.

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    of 1

    B7. (Estimating the WACC) Fuerst Cola has 10,000 bonds and 400,000 shares outstanding.

    The bonds
    have a 10% annual coupon, $1,000 face value, $1,050 market value, and 10-year maturity. The beta on
    the stock is 1.30 and its price per share is $40. The riskless return is 6%, the expected market return is
    14%, and Fuerst Cola’s tax rate is 40%. a. What is the after-tax cost of debt financing? b. What is the
    after-tax cost of equity financing? c. What is the WACC?

    Cost of Debt

    FV -1000
    PV 1050
    PMT -100
    N 10
    Rate 9.21%

    After Tax Cost 5.53%

    Cost of Equity

    Cost of Equity = Risk Free Return + Beta*(expected market return-Risk free Return)
    Cost of Equity= 6+1.30*(14-6)=16.40

    Market value of Debt and Equity

    Market Value of Equity = 400000*40= 16,000,000


    Market Value of Debt = 10000*1050=10,500,000

    Total Capital = 16000000+10500000=$26500,000

    WACC

    WACC= (10500000/26500000)*9.21*(1-.40)+(16000000/26500000)*16.40 =12.09%

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