Hero Manufacturing has 7.6 million shares of common stock outstanding. The current share price is $86...

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Hero Manufacturing has 7.6 million shares of common stockoutstanding. The current share price is $86 and the book value pershare is $5. The company also has two bond issues outstanding. Thefirst bond issue has a face value of $75 million, a coupon rate of6.4 percent and sells for 106.7 percent of par. The second issuehas a face value of $60.5 million, a coupon rate of 6.9 percent andsells for 110.5 percent of par. The first issue matures in 9 years,the second in 25 years.
Suppose the company’s stock has a beta of 1.3. The risk-freerate is 2.9 percent and the market risk premium is 6.8 percent.Assume that the overall cost of debt is the weighted averageimplied by the two outstanding debt issues. Both bonds makesemiannual payments. The tax rate is 23 percent. What is thecompany’s WACC?

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4.1 Ratings (720 Votes)

MV of equityPrice of equitynumber of shares outstanding MV of equity867600000 653600000 MV of Bond1Par valuebonds outstandingage of par MV of Bond11000750001067 80025000 MV of Bond2Par valuebonds outstandingage of par MV of Bond21000605001105 See Answer

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Hero Manufacturing has 7.6 million shares of common stockoutstanding. The current share price is $86 and the book value pershare is $5. The company also has two bond issues outstanding. Thefirst bond issue has a face value of $75 million, a coupon rate of6.4 percent and sells for 106.7 percent of par. The second issuehas a face value of $60.5 million, a coupon rate of 6.9 percent andsells for 110.5 percent of par. The first issue matures in 9 years,the second in 25 years.Suppose the company’s stock has a beta of 1.3. The risk-freerate is 2.9 percent and the market risk premium is 6.8 percent.Assume that the overall cost of debt is the weighted averageimplied by the two outstanding debt issues. Both bonds makesemiannual payments. The tax rate is 23 percent. What is thecompany’s WACC?