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Question: Calculate the WACC of Dracula Enterprises from the following…

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Calculate the WACC of Dracula Enterprises from the following information using both the CAPM model
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and Discounted Cash ow Method. The tax rate is 28 %. • The company has issued 5-year AA rated debt of
$ 400,000 which is trading at a discount of 7 %. • The company has issued 70,000 shares with a par value We'll send you a one-time download
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of $ 10 and have been issued one before. • The book value of the equity is 700,000 • The shares are
trading at a value of $ 43 per share. • Given the interest rate component information below, determine the
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yield on a 5- year, A-rated bond. • Risk free rate 5.9% • In ation premium 4.5% • 5-year Maturity Risk automated text message with a link to get the app. Standard
Premium 2.0% • 1-year Maturity Risk Premium 1.25 % • AA Default Risk Premium 0.6% • A Default Risk messaging rates may apply.

Premium 1.3% • The return on the market was 10 % for the year • The beta of Dracula Enterprises is 1.43 •
The recent dividend paid by the company was $ 3.00 and the next year dividend will be $ 3.5

Expert Answer

Ashwath Narayanan answered this

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1,627 answers

Yield = RF rate + In ation premium+ Maturity risk premium +default risk Premium

for A rated bond

    =5.9%+4.5%+2%+1.3%

   = 13.70%

for AA rated bond

=5.9%+4.5%+2%+0.6%

= 13.00%

Using CAPM,

Ke =   RF + Beta * ( market return - RF)

         =   5.9%+1.43*(10%-5.9%)

          =

Market value of Bond   = Par value* ( 1-discount %)

                                       =   400000*(1-7%)

                                      =

Market Value of Equity = Price per share * No. of shares

                                        = 43 *70000

                                       =

WACC based on CAPM   =     Bond yield* MV of bond / ( MV of bond+MV of equity )   + Ke* MV of equity/ (
MV of bond+MV of equity )  

                                            = 13%*372000/(372000+3010000) + 11.76%*3010000/(372000+3010000)

                                          =   .

Using Discounted CF method

ke =   D1 / Price+ growth %

           D1 = Next year dividend = 3.5

            Price = market price =43

          growth = Next dividend/ current dividend -1

                           = 3.5/2-1
                             = 16.67%

Ke    = D1 / Price+ growth %

        = 3.5/43+16.67%

          =  

WACC based on Disounted CF method =     Bond yield* MV of bond / ( MV of bond+MV of equity )   + Ke*
MV of equity/ ( MV of bond+MV of equity )  

                                                                                     

   = 13%*372000/(372000+3010000) + 24.81%*3010000/(372000+3010000)

                                         =  

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