Question

1. Amkor Corp. is financed by the following proportions of capital:

Bonds: $65 million (70,000 bonds outstanding; 8% annual coupon on $1,000 par; matures 15years),

Common stock: $150 million (5 million shares outstanding, $3.00 dividend next year with 8% annual growth rate).

Preferred stock: $25 million (500,000 shares outstanding, $6.00 dividend per share).

Assume 30% tax rate.

Compute costs of debt, equity, preferred stock and the WACC.

Answer 1

Calculating Cost of Debt,

Bond Par Value = $1,000

Coupon Rate = 8% annually

Time Period = 15 years

Bond Present Value = 6,500,000/70,000 = $928.57

Calculating YTM of Bond,

I = [FV = 1000, PV = 928.57, T = 15, PMT = 80]

I = 8.88%

Calculating Cost of Equity,

Stock Price = 15,000,000/5,000,000 = $30

r = 3/30 + 0.08 = 18.00%

Calculating Cost of Preferred Debt,

Value of Preferred Stock = 25,000,000/500,000 = $50

r = 6/50 = 12.00%

Portfolio Value = 65 + 150 + 25 = $240 million

WACC = 65/240(1 - 0.30)(0.0.088) + (150/240)(0.18) + (25/240)(0.12)

WACC = 0.01668 + 0.1125 + 0.0125

WACC = 14.17%