Calculate the weighted average cost of capital (WACC) for the following firm:
Debt: 10,000 bonds. Each of the bonds matures in 10 years, pays $50 as coupon annually and has a par value of $1,000. The bonds are currently trading for $800 each. The yield to maturity of the bonds is 4% p.a. before tax.
Common stock: 155,000 common stock. The stock’s beta is 1.1. The current price of the stock is $40.
Preferred stock: 5,000 preference shares. The current price of the preference shares is $20 per share and the yearly dividend is $1.15 per share.
Market: The corporate tax rate is 30%. The risk-free rate of return is 2.5% and the market risk premium is 10%.