Question

Testbank, Question 14 A firm has a capital structure that uses 45 percent equity, 20 percent preferred shares, and 35 percent debt. The preferred shares have a current yield of 5.5 percent. The debt has a coupon rate of 10 percent and a current yield to maturity of 6.5 percent. The common shares have a yield of 8 percent. The tax rate is 25 percent. What is the firm’s WACC? 5.231% 6.700% 6.406% 6.975%

Answer #1

Information provided:

Weight of equity= 45%

Weight of preference shares= 20%

Weight of debt= 35%

Yield of common shares= 8%

Yield of preference shares= 5.50%

Yield to maturity= 6.5%

Tax rate= 25%

The weighted average cost of capital is calculated using the below formula:

WACC=Wd*Kd(1-t)+Wps*Kps+We*Ke

where:

Wd= Percentage of debt in the capital structure.

Kd= The before tax cost of debt

Wps= Percentage of preferred stock in the capital structure

Kps=Cost of preferred stock

We**=**Percentage of equity in the capital
structure

Ke= The cost of common equity.

T= Tax rate

WACC= 0.35*6.50%*(1 – 0.25) + 0.20*5.50% + 0.45*8%

= 1.7063 + 1.10 + 3.60

= **6.4063%**

Hence the answer is **option b.**

In case of any query, kindly comment on the solution.

Testbank, Question 12 A firm has a capital structure that uses
45 percent equity, 20 percent preferred shares, and 35 percent
debt. The preferred shares have a current yield of 5.5 percent. The
debt has a coupon rate of 10 percent and a current yield to
maturity of 6.5 percent. The common shares have a yield of 8
percent. There are no taxes. What is the firm’s WACC? 6.575% 6.975%
7.275% 8.200%

Testbank, Question 10 MinMax Corp has the following capital
structure: 55% equity (giving a return of 9%), 10% preferred shares
(with a yield of 6%), and 35% debt (with a coupon rate of 10% and
yield to maturity of 6.5%). If there are no taxes, what is the
firm’s WACC? 10.333% 9.050% 7.825% 6.915%

Percent of capital structure:
Debt
35
%
Preferred stock
20
Common equity
45
Additional information:
Bond coupon rate
11%
Bond yield to maturity
9%
Dividend, expected common
$
5.00
Dividend, preferred
$
12.00
Price, common
$
60.00
Price, preferred
$
120.00
Flotation cost, preferred
$
3.80
Growth rate
8%
Corporate tax rate
40%
Calculate the Hamilton Corp.'s weighted cost of each source of
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Weighted Cost
Debt=
Preferred stock=
Common equity=...

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rate on the debt is 8 percent and the yield to maturity on the debt
is 9.3 percent. You also know that the common equity beta is 1.54,
the market risk premium is 5.5 percent and the risk-free rate is 2
percent, and the tax rate is 40 percent. Find Firm Why's WACC.
Input your answer...

Testbank, Question 16 A firm has 2 million shares outstanding,
which are currently trading at $45 per share and have a dividend
yield of 10 percent. The firm also has $40 million of 6 percent
bonds outstanding that are currently trading at 110, with a yield
to maturity of 3 percent. There are no preferred shares and no
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Given the following information:
Percent of capital structure:
Debt
20
%
Preferred stock
10
Common equity (retained earnings)
70
Additional information:
Bond coupon rate
14%
Bond yield to maturity
12%
Dividend, expected common
$
2.00
Dividend, preferred
$
9.00
Price, common
$
45.00
Price, preferred
$
100.00
Flotation cost, preferred
$
7.50
Growth rate
9%
Corporate tax rate
35%
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55% common equity, with no preferred stock. The yield to maturity
on the company's outstanding bonds is 9%, and its tax rate is 40%.
Pearson's CFO estimates that the company's WACC is 13.20%. What is
Pearson's cost of common equity? Do not round intermediate
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Your company is estimating its WACC. Its target capital
structure is 35 percent debt, 10 percent preferred stock, and 55
percent common equity. Its bonds have a 10 percent coupon, paid
semi-annually, $1000 par value, a current maturity of 8 years, and
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