Question

uppose you are given the following information for the Legends of Clash Co.

Debt: 18,000 bonds outstanding, with a face value of $1,000. The bonds currently trade at 112.5% of par value, and have 15 years to maturity. The coupon rate equals 4%, and the bonds make semi-annual coupon payments.

Common stock: 925,000 shares of common stock outstanding; currently trading for $56 per share. Beta equals 1.45.

Preferred stock: 150,000 shares of preferred stock outstanding; currently trading for $97.5 per share; pays a $8.25 dividend every year.

Market: The expected return on the market equals 10%, and the risk free rate is 1%.

Tax rate: 30%

Calculate the weight of the debt in the capital structure. (Enter percentages as decimals and round to 4 decimal places)

Answer 1

Calculating Cost of Debt,

YTM of Bond,

Using TVM Calculation,

I = [FV = 1,000, PV = 1,125, PMT = 20, T = 30]

I = 2.96%

Value of Debt = 1125(18,000) = $ 20,250,000

Calculating Cost of Equity,

Required Rate = 0.01 + 1.45(0.10 - 0.01)

Required Rate = 14.05%

Amount of Stock = 925,000(56) = $ 51,800,000

Calculating Cost of Preferred Stock,

Cost of Preferred Stock = 8.25/97.50

Cost of Preferred Stock = 8.46%

Value of Preferred Stock = 150,000(97.50) = $14,625,000

Weight of Debt = 20,250,000/(20,250,000 + 51,800,000 + 14,625,000) = 0.2336

Weight of Equity = 51,800,000/(20,250,000 + 51,800,000 + 14,625,000) = 0.5976

Weight of Preferred Stock = 14,625,000/(20,250,000 + 51,800,000 + 14,625,000) = 0.1687

WACC = 0.2336(1 - 0.30)(0.0296) + 0.5976(0.1405) + 0.1687(0.0846)

WACC = 10.3075%