Page 121 - AFM Integrated Workbook STUDENT S18-J19

The weighted average cost of capital (WACC)

Illustration 1

For example, if ABC Co has a 5% coupon bond in issue, redeemable at par in
3 years and currently trading at $105 per $100 nominal, the yield can be
calculated as:
$ DF 3% PV ($) DF 7% PV ($)

T 0 MV (105) 1 (105) 1 (105)
T 1 – T 3 Interest 5 2.829 14.1 2.624 13.1
T 3 Redemption 100 0.915 91.5 0.816 81.6
–––– ––––

0.6 (10.3)
–––– ––––

IRR (k d) = 3% + [0.6/(0.6 + 10.3)] × (7% – 3%) = 3.2%

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