Question

Problem 1: Spreadsheet tab “WACC”. You are tasked with determining Ferris Ltd’s weighted average cost of capital based on the following information.

• Long-term debt consists of 12-year, noncallable bonds. The bonds pay interest semiannually, have a coupon rate of 10%, and currently sell for $1,128

• There are 80,000 bonds outstanding.

• Ferris stock pays an annual dividend of $4 and currently sells for $42. If new preferred stock is sold, Ferris will incur a 6% flotation cost to sell it.

• There are 160,000 preferred shares outstanding.

• Ferris has 4 million shares of common stock outstanding and the current price is $36. Next year’s dividend is expected to be $3.50 and dividends are expected to grow at a constant rate of 4%. If Ferris issues new common stock (there is not enough retained earnings so they will issue new stock in the near future), they will incur a flotation cost of 5%.

• Ferris’ tax rate is 30%

Answer 1

WACC

10.96%

Workings

Pre tax cost of debt	4.15%
YTM	8.30%
Cost of debt	5.81%
Cost of Preferred Stock =D1/Price after flotation	10.13%
Cost of Common Stock =D1/Price after flotation +g	14.23%

	Cost	Market value= Number of securities*Price	Weights
Debt	5.81%	90240000	37.45%
Preferred Stock	10.13%	6720000	2.79%
Common Stock	14.23%	144000000	59.76%

AutoSave off Вok1 - Excel Sign in Share Comme File Home Insert Draw Page Layout Formulas Data Review View Help Tell me what you want to do ΣΑΥ Insert А А" Г Calibri 11 General 5%Delete Conditional Format as Cell Formatting Table Styles Sort & Find & Filter Select Paste В IU - Format % 00 0 Clipboard Alignment Number Styles Cells Editing Font C1 E F A В Market value Cost Number of securities* Price 1 =RATE (12 2,10 %*1000/2,-1128,1000) Debt Pre tax cost of debt 80000*1128 2 C4 Preferred Stock C6 -160000*42 3 YTM C2 2 -с3"(1-30%) Cost of debt Common Stock -C8 4000000*36 4 SUMPRODUCT (F2: F4,H2 : H4) 5 WACC Cost of Preferred Stock D1/Price after flotation 4/(42*94%) 6 7 Cost of Common Stock D1/Price after flotation +g 3.5/(36*95%)+4% 9 10 11 12