Cup Cake Ltd. has 20 million shares of stock outstanding selling at $25 per share and an issue of $30 million in 8 percent

Cup Cake Ltd. has 20 million shares of stock outstanding selling at $25 per share and an issue of $30 million in 8 percent, annual coupon bonds with a maturity of 16 years, selling at 98 percent of par ($1,000). If Cup Cake’s weighted average tax rate is 21 percent, its next dividend is expected to be $2.00 per share, and all future dividends are expected to grow at 4 percent per year, indefinitely, what is its WACC?

 

Equity :

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Cost of equity = (D1 / P0) + g

D1 = next Year dividend

P0 = current Price

g = growth rate

Cost of equity (Ke) = (2 / 25) + 4% = 12%

Value of equity = 20*25 = 500 Million

Debt :

Value of debt = 30*98% = 29.40

cost of debt :

Using financial calculator :

Copupon = 1000*8% = 80

[N = 16 ; I/Y = ? ; PMT = 80 ; PV = -980 ; FV = 1000]

Compute for I/Y

Cost of debt = 8.23%

After Tax cost of debt = 8.23%*(1-21%) = 6.50%

WACC = weight of equity * Cost of equity + weight of debt * After Tax cost of Debt

WACC = (500 / (500+29.40)) * 12% + (29.40 / (500+29.40))*6.50%

WACC = 11.69%