Question

Use the information below on Milner Sisters Inc. to answer the problems below: Common Stock Milner Sisters

has 50,000 shares of common stock outstanding at a market price of $28 a share. Currently, the firm has a beta of 1.13. The risk-free rate is 3% and the market rate of return is 10.5 %. Debt Outstanding bonds mature in 13 years; have a total face value of $750,000; a face value per bond of $1,000 and a market price of $1,011.92 each. The bonds pay 7% coupons, semi-annually. The tax rte is 34%. Preferred Stock The firm has 2,000 shares of 6% preferred stock outstanding at a price of $54 a share. The preferred stock has a par value of $100. What is Milner’s WACC? Identify all numbers and show all work.

Answer 1

Value of Equity = 50000*28 = 1,400,000
Cost of equity = Risk Free rate + Beta*( Cost of equity - Risk Free Rate) =3%+1.13*(10.5%-3%) = 11.48%

Value of debt = 1011.92*750000/1000 = 758940
Par Value =1000
Coupon = 7%*1000/2 = 35
Price = 1011.92
Number of Periods = 2*13 = 26
YTM using Excel Formula =2*RATE(26,35,-1011.92,1000) = 6.86%

Value of Preferred Stock = 2000*54 = 108000
Cost of Preferred Stock = 6%*100/54 = 11.11%

Total Value of firm = 1,400,000 + 758940 + 108000 = 2266940

WACC = Weight of Equity * Cost of Equity + Weight of Debt*Cost of Debt*(1-Tax Rate)+ Weight of Preferred Stock* Cost of Preferred Stock =  1400000/2266940 * 11.48% + 758940/2266940*6.86%*(1-34%) + 758940/2266940*11.11% = 12.32%

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