Question

Phillips Equipment has 80,000 bonds outstanding that are selling at par. Bonds with similar characteristics are...

Phillips Equipment has 80,000 bonds outstanding that are selling at par. Bonds with similar characteristics are yielding 7.5 percent. The company also has 750,000 shares of 7 percent preferred stock and 2.5 million shares of common stock outstanding. The preferred stock sells for $65 a share. The common stock has a beta of 1.34 and sells for $42 a share. The cost of equity is 14.06 percent. The corporate tax rate is 38 percent. What is the firm's weighted average cost of capital?

Homework Answers

Answer #1

WACC = Weighted avg cost of sources in capital structure.

After Tax cost of Debt = YTM ( 1 - Tax rate )

= 7.5% ( 1 - 0.038)

= 7.5% * 0.62

= 4.65%

Particulars Qty Price Value Weight Cost Wt Cost
Bond 80000 $ 100.00 $      80,00,000.00 4.95% 4.65% 0.23%
Pref Shares 750000 $   65.00 $   4,87,50,000.00 30.14% 7% 2.11%
Equity 2500000 $   42.00 $ 10,50,00,000.00 64.91% 14.06% 9.13%
WACC 11.47%

Assumptions:

Bond Face Value = $ 100

Cost of Pref share = 7% ( as Face value is not provided).

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