Question

Hankins Corporation has 7.9 million shares of common stock outstanding, 295,000 shares of 4.2 percent preferred stock outstanding, par value of $100; and 180,000 bonds with a semiannual coupon rate of 5.7 percent outstanding, par value $2,000 each. The common stock currently sells for $58 per share and has a beta of 1.10, the preferred stock has a par value of $100 and currently sells for $98 per share, and the bonds have 17 years to maturity and sell for 106 percent of par. The market risk premium is 6.7 percent, T-bills are yielding 3.4 percent, and the company's tax rate is 23 percent. a. What is the firm's market value capital structure? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., .1616.) b. If the company 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? (Do not round intermediate calculations enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Debt Preferred stock Equity b. Discount rate

Answer 1

A B E Bonds Preferred Stock Common Stock Number Market Price Market Value Market Value based Weights 180000 $2,120 $381,600,000 0.4393 295000 $98 $28,910,000 0.0333 7900000 $58 $458,200,000 0.5274 $868,710,000 b) 11 12 Calculation of Cost of Equity 14 Equity Beta Market Risk Premium Risk-free rate 1.1 6.70% 3.40% 16 17 18 Cost of Equity 10.77% 19 20 Calculation of Cost of Debt 24 34 57 nper (i.e. time to maturity) pmt (i.e. semi-annual coupon) pv (i.e. Current bond price) fv (Redemption value) 2000 RATE (i.e. Semi-annual YTM) 2.58% Annual YTM 5.17% After-tax Cost of Debt 3.98% 33 34 Calculation of Cost of Preferred Stock 36 Annual Dividend Stock Price 98 Cost of preferred stock 4.29% Calculation of Discount Rate 45 Discount Rate (i.e WACC) 7.57%

B D ДА 1 FORMULA SHEET 2 Bonds Preferred Stock Common Stock Number 180000 295000 7900000 Market Price Market Value =2000*106% =C4*D4 =C5*D5 =C6*D6 =SUM(E4:56) Market Value based Weights =E4/E7 =E5/E7 =E6/E7 =SUM(F4:F6) 98 58 Calculation of Cost of Eq 13 Equity Beta Market Risk Premium Risk-free rate 1.1 0.067 0.034 Cost of Equity =C16+(C14*C15) Calculation of Cost of De =17*2 nper (i.e. time to maturity) pmt (i.e. semi-annual coupon) pv (i.e. Current bond price) fv (Redemption value) I=2000*5.7%*0.5 =-2000*106% 2000 RATE (i.e. Semi-annual =RATE(C23,C24,C25,C26) Annual YTM =C28*2 After-tax Cost of Debt =C30*(1-0.23) Calculation of Cost of Preferred Stock Annual Dividend Stock Price =100*4.2% 98 Cost of preferred stock =C37/C38 Calculation of Discount] Discount Rate (i.e WACC=(C18*16)+(C32*54)+(C40*75)