Question

Information

Use the following information about Fox Corp. for problems 7-11.

Common stock: 5,000 shares outstanding, $50 per share. Fox will pay a dividend of $1.50 next year and this dividend is expected to grow at 5% per year.

Bonds: 1,000 bonds outstanding, with a 3% coupon paid semiannually, 5 years to maturity, and a price quote of 101.

Preferred Stock: 1,500 shares outstanding with annual dividends of $4.00, currently selling at $100.

Fox Corp.'s tax rate is 21%.

A) What is Fox Corp.'s Weight of Equity?

B) What is Fox Corp.'s After Tax Cost of Debt?

C) What is Fox Corp.'s Cost of Preferred Stock?

D) What is Fox Corp.'s Cost of Equity?

E) What is Fox Corp.'s WACC?

Answer 1

a). Market Value of Common Equity = 5,000 shares x $50 = $250,000

Market Value of Bonds = 1,000 bonds x $101 = $101,000

Market Value of Preferred Stock = 1,500 shares x $100 = $150,000

Total Market Value = $250,000 + $101,000 + $150,000 = $501,000

Weight of Equity = $250,000/$501,000 = 49.90%

b). To find the Kd, we need to first input the following values into the financial calculator:

INPUT	5 X 2 = 10		-$101	$1.5	$100
TVM	N	I/Y	PV	PMT	FV
		1.39%

This is a semi-annual YTM. So, Annual YTM = 1.39% x 2 = 2.78%

After-Tax Kd = 2.78%(1 - 21%) = 2.20%

c). Kp = Preferred Dividend / Current Market Price = $4/$100 = 4%

d). Ke = (D1/P0) + g

= [$1.50/$50] + 5% = 3% + 5% = 8%

e). WACC = [Wd x After-Tax Kd] + [Wp x Kp] + [We x Ke]

= [($101,000/$501,000) x 2.20%] + [($150,000/$501,000) x 4%] +

[($250,000/$501,000) x 8%]

= 0.44% + 1.20% + 3.99% = 5.63%