Question

Hankins Corporation has the following information about their capital structure: Common Stock:    8.6mm shares selling,...

Hankins Corporation has the following information about their capital structure:

Common Stock:   

8.6mm shares selling, Priced at $65.10/share, Beta of 1.31

Preferred Stock:

Market value of $65,209,000, Priced at $106.90, Dividend of $7.10

Debt:

186,000 bonds valued at $168,330,000, YTM = 9.46%

Market Information:

Risk free rate = 5.55%, Market Premium = 6.85%, Tax Rate = 30%

What is the firm's market value?

What is the firm's cost of each form of financing? (e.g. Re, Rp, Rd)?

If the firm is evaluating a new investment project that has the same risk as the firm's typical project, what rate should the firm use to discount the project's cash flows (WACC)?

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Answer #1

value of common stock=65.10*8.6*1000000=559860000

value of preferred stock=65209000

value of debt=168330000

What is the firm's market value

=559860000+65209000+168330000

=793399000

cost of common stock or Re=5.55%+1.31*6.85%=14.52350%

cost of preferred stock=7.10/106.90=6.64172%

cost of debt before tax=9.46%

cost of debt after tax=9.46%*(1-30%)=6.6220%

what rate should the firm use to discount the project's cash flows (WACC)

=(559860000/793399000)*14.52350%+(65209000/793399000)*6.64172%+(168330000/793399000)*6.6220%

=12.20%

the above will be answer..

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