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Problem:

Erna Corp. has 4 million shares of common stock outstanding. The current share price is $83, and the book value per share is $8. Erna Corp. also has two bond issues outstanding. The first bond issue has a face value of $90 million, has a coupon rate of 6 percent, and sells for 98 percent of par. The second issue has a face value of $60 million, has a coupon rate of 7 percent, and sells for 106 percent of par. The first issue matures in 21 years, the second in 3 years.

Required:

Suppose the most recent dividend was $5.50 and the dividend growth rate is 5 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 35 percent. What is the company's WACC?

Note: Provide support for your rationale.

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Basic Finance, Finance

Category:- Basic Finance
Reference No.:- M91162593

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