Question

You are looking at the following information:

  

Debt:		6,000 5.5 percent coupon bonds outstanding, $1,000 par value, 22 years to maturity, selling for 102 percent of par; the bonds make semiannual payments.
Common stock:		138,000 shares outstanding, selling for $58 per share; the beta is 1.11.
Preferred stock:		18,000 shares of 5 percent preferred stock (review my Ch.8 slide 43: what does "...% preferred stock" phrase mean?) outstanding, currently selling for $104 per share.
Market:		7 percent market risk premium and 5 percent risk-free rate.

  

The company is in the 33 percent tax rate bracket based on its corporate income.

  

Required:

  

Find the WACC. (Do not round your intermediate calculations.)

Multiple Choice

• 8.32%

• 8.72%

• 9%

• 8.39%

• 8.22%

Answer 1

Rf+beta*(Rm-Rf) 0.05+1.11*(0.07) Coupon Preference Кe Face value 44 22*2 nper pmt 100 27.50 1000*5.5%*1/2 (1,020.00) 1000*102 % preference dividend 5 0.1277 Cost of Equity Market price $ 12.77% PV 104 (5/104) Cost of preference shares fv 0.0481 1000 Rate RATE(44,27.5,-1020,1000) 4.81% 2.672% YTM 2,672%*2 5.344% Market value product Market value weight cost Debt 6000*1020 After tax cost of debt 6,120,000.00 0.38260 0.0358 0.0137 preference Equity 0.05344*(1-0.33) 1.872,000.00 18000*104 0.11703 0.0481 3.581% 0.0056 138000*58 8,004,000.00 0.50038 0.1277 0.0639 WACC 15,996,000.00 0.083224 WACC 8.32% Discount rate 8.32% WACC