rate positively ..
a | Rate of equity = | |||||||
Using CAPM rate of equity = Risk free rate + market risk premium * beta | ||||||||
=3.6%+(11%-3.6%)*0.9 | ||||||||
10.26% | ||||||||
using DDM = 3.8/76.5+5% | 9.97% | |||||||
Average required rate = | 10.11% | |||||||
b | Rate of debt (after tax) | |||||||
we have to use financial calculator to compute YTM | ||||||||
Put in calcualtor | ||||||||
PV | -1070 | |||||||
FV | 1000 | |||||||
PMT | 1000*6.4%/2 | 32 | ||||||
N | 15*2 | 30 | ||||||
Compute I | 2.85% | |||||||
YTM = | 2.85%*2 | 5.70% | ||||||
tax rate = | 22% | |||||||
therefore rate of debt (after tax) = 5.7%*(1-22%) | 4.45% | |||||||
rate of debt (after tax) = | 4.45% | |||||||
c | rate of preferred stock = Annual dividend/Current price | |||||||
=4.4/86 | ||||||||
5.12% | ||||||||
Working for rest of question | ||||||||
Computation of Weight and WACC | ||||||||
Market value | weight | Cost of capital | weight * cost | |||||
Source | ||||||||
equity | 26392500 | =345000*76.5 | 64.12% | 10.11% | 6.48% | |||
debt | 13910000 | =13000*1000*107% | 33.79% | 4.45% | 1.50% | |||
preferred stock | 860000 | =10000*86 | 2.09% | 5.12% | 0.11% | |||
41162500 | 8.09% | |||||||
WACC = | 8.09% |
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