Question

Preston Corp. is estimating its WACC. Its target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its bonds have a 12 percent coupon, paid semiannually, a current maturity of 20 years, and sells for $1,100. The firm could sell, at par, $100 preferred stock which pays a 7.74 percent annual dividend, but flotation costs of 5 percent would be incurred. Preston's beta is 1.2, the risk-free rate is 3 percent, and the market risk premium is 5 percent. The firm's marginal tax rate is 40 percent. What is Preston's WACC?

NOTE: Please DO NOT use Excel. Show me how to do with calculator.

Answer #1

Cost of Debt=YTM

Using financial calculator

N=20*2

PV=-1100

PMT=12%*1000/2

FV=1000

CPT I/Y=5.38610%

YTM=5.38610%*2=10.77219%

Cost of preferred stock=Preferred Dividend/(Preferred stock price*(1-flotation cost%))=7.74%*100/(100*(1-5%))=8.14737%

Cost of common stock=risk free rate+beta*market risk premium=3%+1.2*5%=9.00000%

WACC=proportion of debt*ytm*(1-tax rate)+proportion of preferred stock*cost of preferred stock+proportion of common stock*cost of common stock=20%*10.77219%*(1-40%)+20%*8.14737%+60%*9.00000%=8.32214%

Preston Corp. is estimating its WACC. Its target capital
structure is 20 percent debt, 20 percent preferred stock, and 60
percent common equity. Its bonds have a 12 percent coupon, paid
semiannually, a current maturity of 20 years, and sells for $1,100.
The firm could sell, at par, $100 preferred stock which pays a 5.46
percent annual dividend, but flotation costs of 5 percent would be
incurred. Preston's beta is 1.2, the risk-free rate is 3 percent,
and the market...

8.2.2 - Computing WACC
Preston Corp. is estimating its WACC. Its target capital structure
is 20 percent debt, 20 percent preferred stock, and 60 percent
common equity. Its bonds have a 12 percent coupon, paid
semiannually, a current maturity of 20 years, and sells for $1,100.
The firm could sell, at par, $100 preferred stock which pays a 8.7
percent annual dividend, but flotation costs of 5 percent would be
incurred. Preston's beta is 1.2, the risk-free rate is 3...

Rollins Corporation is estimating its WACC. Its target capital
structure is 20 percent debt, 20 percent preferred stock, and 60
percent common equity. Its bonds have a 7.5 percent coupon, paid
semiannually, a current maturity of 20 years, and sell for
$1,105.78. The firm could sell, at par, $100 preferred stock which
pays a 8 percent annual dividend, but flotation costs of 5 percent
would be incurred. Rollins' beta is 1.8, the risk-free rate is 2.45
percent, and the market...

Rollins Corporation is estimating its WACC. Its target capital
structure is 20 percent debt, 20 percent preferred stock, and 60
percent common equity. Its bonds have a 12 percent coupon, paid
semiannually, a current maturity of 20 years, and sell for $1,000.
The firm could sell, at par, $100 preferred stock which pays a 12
percent annual dividend, but flotation costs of 5 percent would be
incurred. Rollins' beta is 1.2, the risk-free rate is 10 percent,
and the market...

Rollins Corporation is estimating its WACC. Its target capital
structure is 20 percent debt, 20 percent preferred stock, and 60
percent common equity. Its bonds have a 12 percent coupon rate paid
semiannually, a current maturity of 20 years, and a price of
$1,000. The firm could sell preferred stock dividends at $12 with a
price of $100. Rollins's beta is 1.2, the risk-free rate is 11
percent, and the market risk premium is 5 percent. Rollins is a
constant-growth...

1) Lipscomb Corporation is estimating its WACC. Its target
capital structure is 20 percent debt, 20 percent preferred stock,
and 60 percent common equity. Its bonds have a 12 percent coupon,
paid semiannually, a current maturity of 20 years, and sell for
1,000 USD. The firm could sell, at par, 100 USD preferred stock
which pays a 12 percent annual dividend, but flotation costs of 5
percent would be incurred. Libscomb is a constant-growth firm which
just paid a dividend...

Rollins Corporation is estimating its WACC. Its target capital
structure is 20 percent debt, 20 percent preferred stock, and 60
percent common equity. Rollins' beta is 1.6 , the risk-free rate is
4 percent, and the market risk premium is 5 percent. Rollins is a
constant-growth firm which just paid a dividend of $2.00, sells for
$30 per share, and has a growth rate of 5 percent. The firm's
policy is to use a risk premium of 5 percentage points...

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
sell for $950. The firm’s preferred stock sell for $75 and pay
quarterly dividend of $2. This company’s beta is 1.25, the
risk-free rate is 4 percent, and the expected market return is 9
percent. The firm's marginal...

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
sell for $950. The firm’s preferred stock sell for $75 and pay
quarterly dividend of $2. This company’s beta is 1.25, the
risk-free rate is 4 percent, and the expected market return is 9
percent. The firm's marginal...

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
sell for $950. The firm’s preferred stock sell for $75 and pay
quarterly dividend of $2. This company’s beta is 1.25, the
risk-free rate is 4 percent, and the expected market return is 9
percent. The firm's marginal...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 2 minutes ago

asked 2 minutes ago

asked 33 minutes ago

asked 39 minutes ago

asked 39 minutes ago

asked 42 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago