Question

Cream and creamsin has a capital of 40% debt and 60% equity. Tax rate is 32%,...

Cream and creamsin has a capital of 40% debt and 60% equity. Tax rate is 32%, bonds trade for 784. Face value is 1,000 coupon rate is 8%, paid semiannual with 7 years to maturity. Common stocks are $15 per share, dividend just paid is 2% and will grow st 6% per year. What is the WACC?
Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Using financial calculator: FV = 1000, PV = -784, Coupon = 40, N = 14

Compute I/Y = 6.38%

Annual I/Y = 6.38% x 2 = 12.76%

YTM is the cost of debt which in this case is 12.76%.

After - tax cost of debt = 12.76% (1 - 32%) = 8.68%

Current Dividend = 2% of 15 = $0.30

Next year's dividend = 0.30 (1 + 6%) = $0.318

Cost of equity= [ Next year's Dividends Price] + Growth% = [0.318 15] + 6% = 8.12%

WACC = Weight Equity x Cost of Equity + Weight Debt x After-tax cost of Debt

= 0.60 x 8.12% + 0.40 x 8.68%

WACC = 8.34%

Note: Here cost of equity (8.12%) is less than than cost of debt (8.68%). This usually doesn't happen in real life as equity is more riskier than debt and has higher rate of return.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
A firm is 65% equity and 35% debt. The firm's marginal tax rate is 40%. Their...
A firm is 65% equity and 35% debt. The firm's marginal tax rate is 40%. Their bonds trade for $990, mature in nine years, have a par value of $1,000, a coupon rate of 8.00% and pay semi-annually. The firm's common stock trades for $27 and just paid a dividend of $5.00. Dividends are expected to grow at 3% forever. The firm's WACC is ___%. PELASE USE FINNACE CALUATOR OR USE BAISC CALUTOR WITH SOULTIONS
Salma Limited finances its operations 40% debt and 60% equity. The company cost of debt is...
Salma Limited finances its operations 40% debt and 60% equity. The company cost of debt is 10%. Stocks of the company currently trade at $55 and dividends of $5 per share was paid. The share is price is expected to grow at a constant rate of 10% a year. N.B. Flotation cost for equity is 5% of the share price; Tax rate is 30%. Compute the following: a) Cost of ordinary share capital;            b) After-tax cost of debt; and...
Patton paints has a target capital structure of 60% debt and 40% equity with no preferred...
Patton paints has a target capital structure of 60% debt and 40% equity with no preferred stock. It'd before tax cost of debt is 12% and marginal tax rate is 40% . The current stock price is $22.50. The last dividend was $2.00 (Do) and is expected to grow at a constant rate of 7%. What is the cost of common equity and WACC?
Porta Potty Corporation has a target capital structure of 60% debt and 40% common equity, with...
Porta Potty Corporation has a target capital structure of 60% debt and 40% common equity, with no preferred stock. Its before-tax cost of debt is 12%, and its marginal tax rate is 40%. The current stock price is P = $22.50. The last dividend was D0 = $2.00, and it is expected to grow at a 7% constant rate. What is its WACC?
Palencia Paints Corporation has a target capital structure of 40% debt and 60% common equity, with...
Palencia Paints Corporation has a target capital structure of 40% debt and 60% common equity, with no preferred stock. Its before-tax cost of debt is 13%, and its marginal tax rate is 25%. The current stock price is P0 = $27.00. The last dividend was D0 = $2.25, and it is expected to grow at a 5% constant rate. What is its cost of common equity and its WACC? Do not round intermediate calculations. Round your answers to two decimal...
X Ltd’s financing policy has established that the optimal capital structure is approximately 60% ordinary equity;...
X Ltd’s financing policy has established that the optimal capital structure is approximately 60% ordinary equity; 10% preferred equity and 30% debt. X marginal corporate tax rate is 40%. X needs to raise shs 600 million to finance a new project and has collected the following information: The current market price of common stock is shs 500 per share and the firm just issue shs 50 dividend per share. Dividends are expected to grow at a rate of 10% per...
Bay Beach Industries wants to maintain their capital structure of 40% debt and 60% equity. The...
Bay Beach Industries wants to maintain their capital structure of 40% debt and 60% equity. The firm's tax rate is 34%. The firm can issue the following securities to finance the investments: Bonds: Mortgage bonds can be issued at a pre-tax cost of 9 percent. Debentures can be issued at a pre-tax cost of 10.5 percent. Common Equity: Some retained earnings will be available for investment. In addition, new common stock can be issued at the market price of $46....
Southern Corporation has a capital structure of 40% debt and 60% common equity. This capital structure...
Southern Corporation has a capital structure of 40% debt and 60% common equity. This capital structure is expected not to change. The firm's tax rate is 34%. The firm can issue the following securities to finance capital investments: Debt: Capital can be raised through bank loans at a pretax cost of 8.5%. Also, bonds can be issued at a pretax cost of 10%. Common Stock: Retained earnings will be available for investment. In addition, new common stock can be issued...
A company has a targeted capital structure of 50% debt and 50% equity. Bond (debt) with...
A company has a targeted capital structure of 50% debt and 50% equity. Bond (debt) with face value (or principal amount) of $1200.00 paid 12% coupon annually, mature in 20 years and sell for $950.90. The company’s stock beta is 1.4, the risk free rate is 9% and market risk premium is 6%. The company has a constant growth rate of 6% and a just paid dividend of $3 and sells at $32 per share. If the company’s marginal, tax...
A company has determined that its optimal capital structure is 40% debt 60% equity. Firm does...
A company has determined that its optimal capital structure is 40% debt 60% equity. Firm does not have sufficient RE to fund equity in the capital budget, cost of capital has to be adjusted for flotation. What is the WACC? Company has 15 Year, 6% annual coupon bonds, with a face value of $1,000 and sells for $980. Net Income = $250,000 Payout Ratio = 10% Tax Rate = 40% Po = $25 Growth = 0% Shares outstanding = 10000...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT