Example 1:
Suppose WSU Incorporated is currently able to issue 10-year maturity bonds selling at par with a face value of $100,000 and the coupon rate of 6%. The interest would be paid annually and the company faces a 30% tax rate. What is the current after tax cost of these bonds? (4.2%)
Example 2:
Suppose WSU Incorporated’s preference shares are currently selling at a price of $20. These shares pay an 8% dividend on a par value of $24. Calculate the cost of these preference shares. (9.6%)
Example 3:
Suppose WSU Incorporated ordinary shares are currently selling for $10 each. The last dividend paid was $1 per share and constant dividend growth of 2% per annum is expected in the future. Using this information, calculate the current cost of these ordinary shares. (12.2%)
Example 4:
Use the CAPM approach to estimate UWS Incorporated’s cost of ordinary shares given the risk-free rate of 6% and the market return of 10%, the beta of the company’s stocks is 1.15. (10.6% p.a.)
Example 5:
Refer to the previous Examples 1, 2 and 3, suppose WSU Incorporated is to raise new capital using a mixture of a new bond issue, a new preference share issue and a new ordinary share issue, with the weight of 0.3, 0.2 and 0.5 respectively. Calculate the WACC in this situation. (9.28%)