Question

Please show all calculations and formulas. If using Excel (or tables), please show data, formulas, etc.

Practice question 14:

Calculate the company’s w.a.c.c. using the info below.

***assume this is a corporate bond that pays 2x annually when calculating the PV of the bond

Harvey LLC’s capital structure consists of a 25-year bond issued 5 years ago with a coupon of 6% and a par value of $14,000,000. The company’s main competitor just issued a similar bond paying 5%. The company has 1,000,000 common shares outstanding at a market price of $14.35 per share and a Beta from Yahoo Finance of 1.53. It has also issued 25,000 shares of preferred stock which is selling today at $235 per share and a annual dividend per share of 13.50. The firm has a 10 year $12,500,000 loan with annual payments at 6.25% interest that it received 2 years ago. The T-note rate is 1.9% and Money Magazine forecasts the return of the S&P 500 for this year at 8.5%. The tax rate for the company is 33%.

Answer 1

Calculation of WACC

Working notes

1.cost of equity(CAPM)=Rf+beta(Rm-Rf)

=1.9+1.53(8.5-1.9)

=11.998% ie :12%

2.Cost of bond =I(1-t)/Par value

=840000(1-.33)/14000000

=4.02%

3.Cost of preference

stock =Dividend/market price

=13.5/235=5.74%

4.Cost of loan =(12500000*6.25%)(1-.33)/12500000

=4.19%

Source of fund	Amount	Weight	cost	WACC(Weight*cost)
Equity stock	(1000000*14.35) 14350000	.3071	12%	3.6852
Preference stock	(25000*235) 5875000	.1257	5.74%	.7215
Bond	14000000	.2996	4.02%	1.2043
Loan	12500000	.2675	4.19%	1.1208
Total	46725000	1		7.8526%