Question

Hankins Corporation has 5.7 million shares of common stock outstanding, 306,000 shares of 4.3 percent preferred stock outstanding, par value of $100, and 165,000 5.3 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $73.20 per share and has a beta of 1.13, the preferred stock currently sells for $104.60 per share, and the bonds have 22 years to maturity and sell for 104 percent of par. The market risk premium is 6.9 percent, T-bills are yielding 3.5 percent, and the firm’s tax rate is 23 percent.

What is the firm's market value capital structure? -market value weight of debt -market value weight of preferred stock -market value weight of equity What is firms cost of each form of financing? -aftertax cost of debt -cost of preferred stock -cost of equity If the firm is evaluating a new investment project that has the same risk as the firm’s typical project, what rate should the firm use to discount the project’s cash flows? -weighted average cost of capital

Answer 1

A.

Market value capital structure :-

A. C Market value of bond 2 Par Value of bond 3 1,000 5.30% Coupon rate Selling Price 5 1,040 No of bonds 6 165,000 Market value of bond 7 171,600,000 Market value of Preferred Stock Selling Price 10 104.6 No of Shares 11 306,000 Market value of Preferred Stock 12 32,007,600 13 Market value of Equity 14 Selling Price 15 73.2 No of Shares 5,700,000.00 16 Market Value of Equity 17 417,240,000 18 Total Market Value 19 620,847,600 20 Market value weight of debt 27.64% 21 Market value weight of Preferred Stock 5.16% 22 Market value weight of Equity 67.20% 23 st

A. В C 1 Market value of bond 2 Par Value of bond 3 1000 Coupon rate 0.053 - 104%*C3 Selling Price 5 No of bonds 6 165000 Market value of bond -С5*Cб 7 Market value of Preferred Stock Selling Price 104.6 10 No of Shares 11 306000 Market value of Preferred Stock -C10*C11 12. 13 Market value of Equity 14 Selling Price 73.2 15 No of Shares 5.7*10^6 16 Market Value of Equity C15*C16 17 18 Total Market Value -С7+C12+C17 19 20 -с7/с19 Market value weight of debt 21. C12/C19 Market value weight of Preferred Stock Market value weight of Equity 22 =C17/C19 23 st LO

Cost of Financing :-

After tax cost of debt = 5.3% * (1 - 0.23) = 4.08%

Cost of Preferred Stock = 4.3%

Cost of Equity = 3.5% + 1.13 * (6.9%) = 11.29%

Weighted Average Cost of Capital (WACC) is computed by multiplying the respective market value weights to the cost of financing

Hence, WACC =

1 2 A B C 20 Market value weight of debt 27.64% 21 Cost of Debt 4.08% 22 Market value weight of Preferred Stock 5.16% 23 Cost of Preferred Stock 4.30% 24 Market value weight of Equity 67.20% 25 Cost of Equity 11.29% 26 27 8.94% 28 WACC 29

1 2 A B 20 C7/C19 Market value weight of debt 21 Cost of Debt 22 0.0408 C12/C19 Market value weight of Preferred Stock 23 Cost of Preferred Stock 0.043 24 Market value weight of Equity C17/C19 25 Cost of Equity 26 0.1129 27 (C21*C22)+(C23 C24)+(C25*C26) 28 WACC 29