Daniel's Sound Systems has 210,000 shares of common stock outstanding at a market price of $36 a share. Last month, Daniel's paid an annual dividend in the amount of $1.593 per share. The dividend growth rate is 4%. Daniel's also has 6,000 bonds outstanding with a face value of $1,000 per bond. The bonds carry a 7% coupon, pay interest annually, and mature in 4.89 years. The bonds are selling at 99% of face value. The company's tax rate is 34%. What is Daniel's weighted average cost of capital

0.0038 %

Explanation:

WACC = Cost of Equity x Weight of Equity + Cost of Debt x Weight of Debt

where,

Cost of Equity Calculation

Cost of Equity = ($1.593 x 1.04) ÷ $36 + 0.04 = 11.33 %

Cost of Debt Calculation

PMT = 1000 x 7 % = $70

N = 4.89

PV = $ 1,000 x 99 % = $990

FV  = 1,000

P/YR = 1

YTM = ?

Therefore Pre- tax cost of debt is 7.25 %

After tax cost of debt = 7.25 % x ( 1 - 0.34)

                                    = 4.79 %

Weight of Equity = 210,000 x $36 / (210,000 x $36 + 6,000 x $1,000)

                            = 0.0010

Weight of Debt = 6,000 x $1,000 / (210,000 x $36 + 6,000 x $1,000)

                            = 0.00079

Now

WACC = 11.33 % x 0.0010 + 4.79 % x 0.00079

Therefore

Daniel's weighted average cost of capital is 0.0038 %

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