The Oriole Products Co. currently has debt with a market value
of $275 million outstanding. The debt consists of 9 percent coupon
bonds (semiannual coupon payments) which have a maturity of 15
years and are currently priced at $1,423.92 per bond. The firm also
has an issue of 2 million preferred shares outstanding with a
market price of $13 per share. The preferred shares pay an annual
dividend of $1.20. Oriole also has 14 million shares of common
stock outstanding with a price of $20.00 per share. The firm is
expected to pay a $2.20 common dividend one year from today, and
that dividend is expected to increase by 5 percent per year
forever. If Oriole is subject to a 40 percent marginal tax rate,
then what is the firm’s weighted average cost of capital?
Calculate the weights for debt, common equity, and preferred
equity. (Round intermediate calculations and final
answers to 4 decimal places, e.g. 1.2514.)
Debt | |||
Preferred equity | |||
Common equity |
Calculate the cost of debt. (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.)
Cost of debt | % |
Calculate the cost of preferred equity. (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.)
Cost of preferred equity | % |
Calculate the cost of common equity. (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 0 decimal places, e.g. 15%.)
Cost of common equity | % |
What is the firm’s weighted average cost of capital? (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.)
WACC | % |
1.
=275/(275+2*13+14*20)=0.473321858864028
2.
=2*13/(275+2*13+14*20)=0.044750430292599
3.
=14*20/(275+2*13+14*20)=0.481927710843373
4.
Pre tax
cost=RATE(15*2,9%*1000/2,-1423.92,1000)*2=4.96001180303363%
After tax cost=RATE(15*2,9%*1000/2,-1423.92,1000)*2*(1-40%)=2.97600708182018%
5.
=1.2/13=9.23076923076923%
6.
=2.2/20+5%=16.00%
7.
=275/(275+2*13+14*20)*RATE(15*2,9%*1000/2,-1423.92,1000)*2*(1-40%)+2*13/(275+2*13+14*20)*1.2/13+14*20/(275+2*13+14*20)*(2.2/20+5%)=9.53253347246222%
Get Answers For Free
Most questions answered within 1 hours.