You wish to value abc corp and need to calculate its

Question

Weighted Average Cost of Capital Exercise

You wish to value ABC Corp and need to calculate its weighted average cost of capital (WACC).  You get the most recent 10-K filing and dig into the footnotes to uncover the following items related to ABC's debt.  You look up the current price of each of ABC's bond using Bloomberg to reveal:

Long-term debt

Long-term debt
Tenor (yr)	Coupon	Principal ($mil)	Price
3	6.00%	150	101.56
5	6.25%	400	102.34
7	8.00%	250	114.36

Exercise 1. 

• Using the information above, calculate the yield to maturity on each of ABC's bonds assuming semi-annual pricing convention. 
• Calculate the total amount of long-term debt outstanding by summing the principal on the three bonds.
• Determine the weighted average yield to maturity on ABC's long-term debt by taking the weight of each bond times its yield (calculated in part A above) and then summing these yields across the three bonds.

Long-term debt
amount	average yield
$800.00	5.47%

Short-term debt

ABC Corp has a $250 million revolving line of credit that is used for working capital needs and general corporate purposes and is considered permanent capital.  Currently there is $50 million drawn and this carries an interest rate of Libor + 200 basis points.  Assume Libor is 0.50% now.

Exercise 2.

Treat the revolving line of credit as short-term debt and determine the amount and the cost of this funding.

Short-term debt
amount	average yield
$50.00	2.50%

Equity

In 2005, ABC issued 10 million shares at $20 per share and these shares are still outstanding.  The current stock price is $145.67 with a risk-free rate of 4%, market risk premium of 6%, and beta of 1.25.

Equity amount cost $1,456.70 11.50%

All together now...

WACC = w_dk_d(1-T)+w_stdk_std(1-T)+w_ek_e

Assume a corporate tax rate of 35%

Calculate the total capitalization by adding the amounts from long-term debt, short-term debt, and equity.  Determine the weights of each by dividing the individual amount by the total capitalization.

wd	kd	(1-T)	wstd	kstd	(1-T)	we	ke

WACC = _____________