Question

5 17 20 Chp 14 Quiz 20 WACC.pdf x 6 pope/Downloads/17_20_Chp%2014_Quiz%2020%20WACC.pdf Watch Game & Welcome to Utah S... O Dashboard The Wall Street Jour. A USU Testing Service M GMAIL M AggieMail Eastern Music has 20,000 shares of common stock outstanding at a price per share of $30. The firm also has 5,000 share of 5 percent preferred stock outstanding at a price per share of $60. The preferred stock has a stated value of $100. The company has a bond outstanding that sells for $102 and matures in 5 years. The total face value of the bond is $300,000. The bond pays semi-annual coupons and has a coupon rate of 4%. The company has a beta of 1.66. The ten-year US treasury bond yield is 3%. The market risk premium is 5%. What is the company's cost of equity? 72 10.7% 8% 032

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

в C F G Capital Equity Preferred stock Unit 20,000.00 5,000.00 3,000.00 Price per unit $30.00 $60.00 $102.00 Value $600,000.00 $300,000.00 $306,000.00 $1,206,000.00 Weight 49.75% 24.88% 25.37% Cost 11.3% 8.3% 2.7% Debt 1 Beta Treasury Bond yield Market risk premium Cost of Equity 1.66 3% 5% 11.3% 11 12 13 14 $100.00 15 16 17 2 Face value of Bond Coupon rate Coupon frequency Years to maturity Current Price Yield to maturity Tax rate After tax Cost of Debt $102.00 3.56% 25% 2.7% 24 $100.00 5% 3 Preferred stock Face value Dividend rate Preferred dividend Price of Preferred stock Cost of Preferred stock $60.00 8.3% 28 29 4 Debt to Capital ratio 25.4% 25 40% 32 33 5 Company's WACC 8.4% 24

Cell reference -

A B C D E F G Unit Price per unit Cost Capital Equity Preferred stock Debt 20000 5000 =300000/100 30 60 102 Value =C3*D3 =C4*D4 =C5*D5 =SUM(E3:E5) Weight =E3/$E$6 =E4/$E$6 =E5/$E$6 =C12 =C28 =C21 9 1 Beta Treasury Bond yield Market risk premium Cost of Equity 1.66 0.03 0.05 =C10+C9*C11 12 14 2 100 0.04 15 16 Face value of Bond Coupon rate Coupon frequency Years to maturity Current Price Yield to maturity Tax rate After tax Cost of Debt 102 |=2*RATE(C17*2,-C15/2*C14,018,-C14,0) 0.25 =C19*(1-C20) 24 3 25 26 Preferred stock Face value Dividend rate Preferred dividend Price of Preferred stock Cost of Preferred stock 100 0.05 =C24*C25 60 =C26/027 30 4 Debt to Capital ratio =E5/E6 31 =SUMPRODUCT(F3:F5, G3:45) 325 Company's WACC 33

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