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Chiquitica Company currently does not use any debt at all? (it is an? all-equity firm). The firm has 4,000,000 shares selling for $50 per share. Its beta is 0.8, and the current risk-free rate is 2%. The expected market return for the coming year is 12%. Chiquitica Company will sell $40,000,000 in corporate bonds with a $1,000 par value. The bonds have a yield to maturity of 12%. When the bonds are sold, the beta of the company will increase to 1.2. Chiquitica will use the entire proceeds of the bond sale to repurchase an equal dollar amount of its equity (buyback shares). The corporate tax rate is 25%.

Required:
a. What is the WACC of Chiquitica Company before the bond sale?
b. What is the market value of debt after the bond sale?
c. What is the market value of equity after the bond sale?
d. What is the weight for equity in the capital structure (the value E/V) - used to compute the WACC?
e. What is the cost of debt after the bond sale?
f. What is the cost of equity after the bond sale?
g. What is the adjusted WACC of Chiquitica Company after the bond sale?

Sagot :

Tundexi

Answer:

a. WACC of the company before bond sale = Risk Free Rate + Beta * (Market return - Risk Free rate)

= 2% + 0.80 * 10%

= 2% + 0.80*0.1

= 2% + 8%

= 10%

b. Market value of Debt after Bond sales = $40,000,000

c. Market Value of equity = Current Value of Equity + Debt * tax rate - Debt

= 50*4,000,000 + 40000000*25% - 40000000

= 200000000 + 10000000 - 40000000

= $170,000,000

d. Weight of equity = Market value of equity / Total value of equity

= 170000000 / 200000000 + 10000000

= 170000000 / 210000000

= 0.80952381

= 81%

e. Cost of debt after bond sale = YTM * (1 - tax Rate)

= 12% * 0.75

= 0.09

= 9%

f. Cost of equity after bond sale = Risk Free Rate + Beta * (Market return - Risk Free rate)

= 2% + 1.20 * 10%

= 0.02 + 0.12

= 0.14

= 14%

g. Adjusted WACC = weight of debt * Cost of debt + weight of equity * cost of equity

= 19% * 9% + 81% * 14%

= 0.0171 + 0.1134

= 0.1305

= 13.05%

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