Question

Tempest Manufacturing has 8 million shares of common stock outstanding. The current share price is $73, and the book value per share is $7. Tempest Manufacturing also has one bond issue outstanding. The bond issue has a face value of $70 million, a 7 percent coupon, and sells for 97 percent of par. The bonds mature in 21 years. Suppose the most recent dividend was $4.10 and the dividend growth rate is 6 percent. Assume the par value of each bond is $1,000. The bonds make semiannual payments. The tax rate is 35 percent. As the first step in determining the company’s WACC, what weights would be used and how would you set up the equation for rWACC? You do not need to calculate any returns

Answer 1

­SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

AS IT IS TOLD NOT TO CALCULATE ANY RETURN, I HAVE NOT CALCULATED : rs AND rd. IF YOU NEED HELP ON THIS, LET ME KNOW

08:06 ' vo a 1x 2 ENG 20-03-2020 E24 ... 7 X NE65 X fc MZ NA NB NC ND NE NE NG NH A 46 49 50 51 52 SOURCE MARKET VALUE WEIGHTS 53 54 DEBT (70 x 97%] COMMON STOCK 55 67.9 10.42% [67.9/651.9] 584 89.58% (584/651.9] 651.9 100.00% 56 57 58 ANSWER WEIGHT TO BE USED FOR DEBT= WEIGHT TO BE USED FOR COMMON STOCK = 10.42% [We] 89.58% [wd] 59 ANSWER rWACC = We*re + Wd*rd*(1-t) 63 64 65 66 67 68 69 KE CAPM UTILITY, SHARPE, beta coNvexity DGM beta port future INDEX INTL CAP BUD SANDRINE LEASING PORTFOLOQ DIR right clean YIELD bc ... 1