Question

FINA Inc.’s assets are $500 million, financed through bank loans, bonds, preferred stocks and common stocks. The amounts are as follows:

Bank loans: $ 100 million borrowed at 9%

Bonds: $180 million, paying 9% coupon with semi-annual payments, and maturity of 5 years. FINA sold its $1,000 par-value bonds for $940 and had to incur $40 flotation cost per bond.

Preferred Stocks: $20 million, paying $15 dividends per share. FINA sold its preferred shares for $210 and had to incur $10/share flotation cost.

Common Stocks: $200 million, the beta of FINA stocks is 1.2, the 90 day Treasury yield is 1%, return on market portfolio is 12 %.

If FINA is subject to 40% tax rate, what is the WACC for FINA?

Answer 1

Answer: Cost of best or Bonds, Kde I (17) + Fus Fts where, 1 - Annual Interest changes t= Tax Rate n = No. of years F = Redeemable value at the time of maturity S = Net sales proceeds from issue of debt Face Value - Flotation Cost) Cost of Bonds, kd = 16.2 (1-0.4) + (940-( 1000-40) CEP 940+ Cloon -40 2 = 9.72 +-4 950 = = 0.0060 x 100 0.607.

cost of common stocks - Treasury yield + Beta ke ( Return on market poetfolio - Treasu ry yield) = 1 + 1.2 (12-1 = 1 + 13.2 X10011 so = 14.2% Note. All costs are expressed in percent.

Cost of preferred stacks , kp e D(1 + dt) NS x whose gutest pro D = Preference Dividend dt = Dividend Tax Ns = Net sale proceeds (Issue. Price - Flotation Cost) Cost of preferred states = 15 210-10 = 15/200 x100 = 7.5 7.

Computation of Weighted Average cost of capital (Wace Source Amount ($) Weight Cast of Capital overall cost of capiti Bank Loan loo 0.20 9.00% 1.80 Bonds so 180 A 0.36 to 0.601 0.216 Pre stocks 20 0.04 at 7.50% 0.30 Common stocks 200 0.400 14.201. 5-68 500 031 her 8 7.996.%. WACC of FINA = 7.996 y. Note: All the amounts are expresed us Dollar ($)