Question

question1- ChromeWoeld Industries finances its project with 15% debt, 5% preferred stock and 80% common stock.

The company has 6 year 3% coupon bonds selling at 101 ( par is 100)

The company’s preferred stock has a 5% preferred dividend on a par value of 100 that is currently priced at 99. Preferred has a flotation cost of .07.

The company’s common stock currently sells for $25.50 a share and has a dividend that is currently $1.80 a share and is expected to grow at a constant rate of 2.5% per year.

Assume that the flotation cost for new stock is .04. the firm has 30,000,000 in retained earnings. The company’s tax rate is 34%.

Calculate and graph the firm’s MCC?

Question2- ChromeWoeld Industries finances its project with 15% debt, 8% preferred stock and 77% common stock.

The company can issue bonds at a yield to maturity of 6.5% for next 3,500 for debt issued beyond this level there will be a 1.5% premium.

The price of preferred stock is 105, the preferred dividend is 10 and flotation costs for Preferred are 5%.

The company’s common stock currently sells for $22.75 a share.

The company’s dividend is currently $1.98 a share and is expected to grow at a constant rate of 6% per year.

Assume that net income is 58,000 and the payout ratio is 50the flotation costs for new equity is 7%.

The company’s tax rate is 38%.

Calculate and graph the firm’s MCC?

i need help, please

Answer 1

Question 1:

Capital structure: 15% debt, 5% preferred stock and 80% common stock

Debt:

N = 6, FV = $100, PMT = $3, PV = $101; compute RATE = 2.82%

Before-tax cost of debt = 2.82%

Preferred stock:

Dividends = 100*0.05 = $5

Current price = $99

Cost of preferred stock = 5 / (99 * (1 - 0.07) = 0.0543 = 5.43%

Common stock:

Cost of common stock = 1.8 * 1.025 / (25.50 * (1 - 0.04)) + 0.025 = 0.1004 = 10.04%

Now compute WACC as follow

WACC = Wd * Rd * (1 - Tax rate) + (Wp * Rp) + (We * Re)

WACC = 0.15*2.82*(1 - 0.34) + 0.05*5.43 + 0.80*10.04 = 8.583%