Reference no: EM133005848

Question - You currently work for a company that is 100% financed by debt. Specifically, 1000 debentures. The debentures have a face value of $1000, pay a semi-annual coupon of 10% p.a. and have five years remaining until maturity. The debentures are currently priced at $1,081.11 each. A few months ago, the company faced a sudden, one-off need for liquidity and took out a short-term bank loan of $500,000 at an annualized rate of 8%. The CFO did not like taking on this short-term debt and thinks that a better option would be for the company to issue some equity. He thinks an appropriate ratio of debt to equity would be 4:1. She has asked you to determine what the company's WACC would be if it were to issue this equity.

You have found the following information:

The average annualized return on Commonwealth government bonds is 2% for 10-year bonds, and 1.5% for 6-month bills.

The market risk premium is 3% and the standard deviation of the market is 0.043.

The tax rate is 30%. Assume a classical tax system.

You have found a company, Competition Ltd., that is in the same industry as your company, and you think it is an appropriate comparable. Information on Competition is as follows:

Price of bonds: $1,311.56

Number of bonds: 1000

Market value of equity: $3,688,440

The standard deviation of the returns on Competition Ltd is 0.049

Correlation with the market: 0.30

Calculate the WACC if your company were to take on the equity as proposed by the CFO.