Question

You are given the following information on Parrothead Enterprises:
Debt:	9,300 7.4 percent coupon bonds outstanding, with 21 years to maturity and a quoted price of 108.75. These bonds pay interest semiannually and have a par value of $2,000.
Common stock:	320,000 shares of common stock selling for $66.40 per share. The stock has a beta of 1.09 and will pay a dividend of $4.60 next year. The dividend is expected to grow by 5.4 percent per year indefinitely.
Preferred stock:	9,900 shares of 4.7 percent preferred stock selling at $95.90 per share. The par value is $100 per share.
Market:	10.1 percent expected return, risk-free rate of 4.55 percent, and a 24 percent tax rate.

Calculate the company's WACC.

Answer 1

Debt Equity Preferred Value Weight Cost 20,227,500.00 47.68% 5.03% 21,248,000.00 50.08% 10.60% 949,410.00 2.24% 4.90% 42,424,910.00 WACC Weight*cost 2.40% 5.31% 0.11% 7.82% Debt Equity Preferred Value Weight 1 =9300*(2000*108.75%) 1=C4/$C$7 =320000*66.4 =C5/$C$7 =9900*95.9 =C6/$C$7 1 =SUM(C4:C6) Cost =(RATE(21*2,7.4%/2*2000,-108.75%*2000,2000)*2)*(1-0.24) =4.55%+1.09*(10.1%-4.55%) =4.7/95.9 WACC Weight* cost =E4*D4 =E5*D5 =E6*D6 =SUM(F4:F6)