Question

Company has 60,000 bonds with 30-year life outstanding, 15 years until maturity. The bonds carry a 10 percent semi-annual coupon, and are currently selling for $874.78.

You have 100,000 shares of $100 par, 9% dividend perpetual preferred stock outstanding. The current market price is $90. Any new issues of preferred stock would incure a $3.00 per share flotation cost.

The company has 5 million shares of common stock outstanding with a currently price of $14 per share. The stock exhibits a constant growth rate of 10 percent. The last dividend was $.80. New stock could be sold with flotation costs, including market pressure, of 15 percent.

The risk-free rate is currently 6 percent, and the rate of return on the stock market as a whole is 14 percent. Your stock’s beta is 1.22.

Your fimr does not use notes payable for long-term financing.

Your firm’s federal + state marginal tax rate is 40%

Before-Tax Cost of Debt          11.80%

After-Tax Cost of Debt 7.08%

Preferred stock 10.34%

average cost of retained earnings

DCF       16.29%

Compute the WACC (carry weights to four decimal places)

Answer 1

Market value of debt = 60,000 * 874.78 = 52,486,800

Market value of preferred stock = 100,000 * 90 = 9,000,000

Market value of common stock = 5,000,000 * 14 = 70,000,000

Total market value of capital structure = 52,486,800 + 9,000,000 + 70,000,000

Total market value of capital structure =131,486,800

Weight of debt = 52,486,800 / 131,486,800 = 0.3992

Weight of preferred stock = 9,000,000 / 131,486,800 = 0.0684

Weight of equity = 70,000,000 / 131,486,800 = 0.5324

WACC = weight of equity * cost of equity + weight of preferred stock * cost of preferred stock + weight of debt * cost of debt

WACC = 0.5324 * 0.1629 + 0.0684 * 0.1034 + 0.3992 * 0.0708

WACC = 0.086728 + 0.007073 + 0.028263

WACC = 0.122064 or 12.2064%