CHAPTER 14
B-257
b.
Using the equation to calculate WACC, we find:
WACC = .094 = (1/2.05)R
E
+ (1.05/2.05)(.068)
R
E
= .1213 or 12.13%
15.
We will begin by finding the market value of each type of financing. We find:
MV
D
= 8,000($1,000)(0.92) = $7,360,000
MV
E
= 250,000($57) = $14,250,000
MV
P
= 15,000($93) = $1,395,000
And the total market value of the firm is:
V = $7,360,000 + 14,250,000 + 1,395,000 = $23,005,000
Now, we can find the cost of equity using the CAPM. The cost of equity is:
R
E
= .045 + 1.05(.08) = .1290 or 12.90%
The cost of debt is the YTM of the bonds, so:
P
0
= $920 = $32.50(PVIFA
R%,40
) + $1,000(PVIF
R%,40
)
R = 3.632%
YTM = 3.632% × 2 = 7.26%
And the aftertax cost of debt is:
R
D
= (1 – .35)(.0726) = .0472 or 4.72%
The cost of preferred stock is:
R
P
= $5/$93 = .0538 or 5.38%
Now we have all of the components to calculate the WACC. The WACC is:
WACC = .0472(7.36/23.005) + .1290(14.25/23.005) + .0538(1.395/23.005) = .0983 or 9.83%
Notice that we didn’t include the (1 – t
C
) term in the WACC equation. We used the aftertax cost of debt
in the equation, so the term is not needed here.
16.
a.
We will begin by finding the market value of each type of financing. We find:
MV
D
= 105,000($1,000)(0.93) = $97,650,000
MV
E
= 9,000,000($34) = $306,000,000
MV
P
= 250,000($91) = $22,750,000
And the total market value of the firm is:
V = $97,650,000 + 306,000,000 + 22,750,000 = $426,400,000

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