Question

Vandelay Industries is considering four average risk projects
with information below

related to their rates of return. Determine Vandelay
Industries' WACC.

INPUTS USED IN THE MODEL

Tax rate 30%

B-T rd 8%

Net Pps $35.00

Dps $5.00

P0 $50.00

D1 $2.50

g 5%

Vandelay's beta 1.1

Market risk premium, RPM 7.50%

Risk free rate, rRF 3.0%

Target capital structure from common stock 60%

Target capital structure from preferred stock 15%

Target capital structure from debt 25%

Calculate the cost of each capital component, that is, the
after-tax cost of debt, the cost of preferred stock (including
flotation costs), and the cost of equity (ignoring flotation
costs). Use both the the CAPM method and the dividend growth
approach to find the cost of equity.

Cost of debt:

B-T rd ×

(1 – T) = A-T rd

Cost of preferred stock (including flotation costs):

Dpf /

Net Ppf = rpf

Cost of common equity, dividend growth approach (ignoring
flotation costs):

D1 /

P0 +

g =

rs

Cost of common equity, CAPM:

rRF + b × RPM = rs

Vandelay Industries will continue to use the same capital
structure, what is the company's WACC?

wd 25.0%

wps 15.0%

ws 60.0%

100.0%

wd × A-T rd +

wpf × rpf +

ws × rs

= WACC

Answer #1

cost of debt (after tax) = B - T rd*(1 - t)

= 8%*(1 - 0.3)

= **5.6%**

cost of preferred stock: = Dpf / Net Ppf

= 5 / 35

= **14.29%**

cost of common equity = (D1 / P0) + g

= (2.5 / 50) + 5%

= **10%**

Cost of common equity (CAPM) :

= 3% + 1.1(7.5%)

= **11.25%**

WACC:

using the formula given above,

WACC = (0.25* 5.6) + (0.15 * 14.29) + (0.6*10)

= 1.4 + 2.14 + 6

= **9.54%**

**(NOTE : for calculating WACC cost of equity calculated
under dividend discount model taken.if CAPM cost of equity taken
answer would be different. please consider)**

The stock of Gao Computing sells for $50, and last year's
dividend was $3.13. Security analysts are projecting that the
common dividend will grow at a rate of 7% a year. A flotation cost
of 10% would be required to issue new common stock. Gao's preferred
stock sells for $32.61, pays a dividend of $3.30 per share, and new
preferred stock could be sold with a flotation cost of 8%. The firm
has outstanding bonds with 20 years to maturity,...

Adamson Corporation is considering four average-risk projects
with the following costs and rates of return:
Project
Cost
Expected Rate of Return
1
$2,000
16.00%
2
3,000
15.00
3
5,000
13.75
4
2,000
12.50
The company estimates that it can issue debt at a rate of
rd = 11%, and its tax rate is 25%. It can issue
preferred stock that pays a constant dividend of $6.00 per year at
$49.00 per share. Also, its common stock currently sells for $32.00...

Adamson Corporation is considering four average-risk projects
with the following costs and rates of return:
Project
Cost
Expected Rate of Return
1
$2,000
16.00%
2
3,000
15.00
3
5,000
13.75
4
2,000
12.50
The company estimates that it can issue debt at a rate of
rd = 11%, and its tax rate is 25%. It can issue
preferred stock that pays a constant dividend of $4.00 per year at
$60.00 per share. Also, its common stock currently sells for $46.00...

Sunsun Corporation is considering four average-risk projects
with the following costs and rates of return:
Project
Cost
Expected Rate of Return
1
$2,000
16.00%
2
3,000
15.00
3
5,000
13.75
4
2,000
12.50
The company estimates that it can issue debt at a rate of
rd = 9%, and its tax rate is 25%. It can issue preferred
stock that pays a constant dividend of $5.00 per year at $48.00 per
share. Also, its common stock currently sells for $38.00...

Adamson Corporation is considering four average-risk projects
with the following costs and rates of return:
Project
Cost
Expected Rate of Return
1
$2,000
16.00%
2
3,000
15.00
3
5,000
13.75
4
2,000
12.50
The company estimates that it can issue debt at a rate of
rd = 11%, and its tax rate is 40%. It can issue
preferred stock that pays a constant dividend of $5 per year at $40
per share. Also, its common stock currently sells for $30...

Adamson Corporation is considering four average-risk projects
with the following costs and rates of return:
Project
Cost
Expected Rate of
Return
1
$2,000
16.00%
2
3,000
15.00
3
5,000
13.75
4
2,000
12.50
The company estimates
that it can issue debt at a rate of rd = 9%, and its tax
rate is 35%. It can issue preferred stock that pays a constant
dividend of $4 per year at $41 per share. Also, its common stock
currently sells for $30...

Adamson Corporation is considering four average-risk projects
with the following costs and rates of return:
Project
Cost
Expected Rate of Return
1
$2,000
16.00%
2
3,000
15.00
3
5,000
13.75
4
2,000
12.50
The company estimates that it can issue debt at a rate of
rd = 9%, and its tax rate is 25%. It can issue preferred
stock that pays a constant dividend of $5.00 per year at $50.00 per
share. Also, its common stock currently sells for $36.00...

Adamson Corporation is considering four average-risk projects
with the following costs and rates of return: Project Cost Expected
Rate of Return 1 $2,000 16.00% 2 3,000 15.00 3 5,000 13.75 4 2,000
12.50 The company estimates that it can issue debt at a rate of rd
= 9%, and its tax rate is 25%. It can issue preferred stock that
pays a constant dividend of $5.00 per year at $50.00 per share.
Also, its common stock currently sells for $33.00...

Adamson Corporation is
considering four average-risk projects with the following costs and
rates of return:
Project
Cost
Expected Rate of
Return
1
$2,000
16.00%
2
3,000
15.00
3
5,000
13.75
4
2,000
12.50
The company estimates
that it can issue debt at a rate of rd = 11%, and its
tax rate is 25%. It can issue preferred stock that pays a constant
dividend of $4.00 per year at $47.00 per share. Also, its common
stock currently sells for $33.00...

Adamson Corporation is considering four average-risk projects
with the following costs and rates of return:
Project
Cost
Expected Rate of Return
1
$2,000
16.00%
2
3,000
15.00
3
5,000
13.75
4
2,000
12.50
The company estimates that it can issue debt at a rate of
rd = 10%, and its tax rate is 40%. It can issue
preferred stock that pays a constant dividend of $6 per year at $60
per share. Also, its common stock currently sells for $38...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 2 minutes ago

asked 14 minutes ago

asked 28 minutes ago

asked 29 minutes ago

asked 30 minutes ago

asked 30 minutes ago

asked 38 minutes ago

asked 47 minutes ago

asked 58 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago