Question

A Dozen Monkeys Ltd. has the following right-hand side of its balance sheet: __________________________________________________________ Debt: 8% coupon, 12 years to maturity……………… $ 8,000,000 Preferred shares: 5% dividend……………………….. 1,000,000 Common shares: 750,000 outstanding………………. 1,500,000 Retained earnings……………………………………. 4,500,000 $15,000,000 __________________________________________________________ New debt could be issued to yield 10 percent, with floatation costs netting the firm $970 on each $1,000 bond. Preferred shares would require a current yield of 8 percent, with aftertax floatation costs of 4 percent. Common shares currently trade at $15.00, but new shares would be discounted to $14.25 to encourage sales. Aftertax floatation costs on new common shares would be 5 percent. The anticipated dividend growth rate is 6 percent. The expected dividend this year is $1.50. A Dozen Monkeys Ltd. has a 40 percent tax rate and would require new share capital to fund new investments. Based on market value weightings, calculate Monkey’s weighted average cost of capital.

Answer 1

Market price of bond	Using present value function in MS excel	pv(rate,nper,pmt,fv,type) rate = 10% nper = 12 pmt = 80 fv =1000 type =0	PV(10%,12,80,1000,0)	($863.73)
market price of preferred stock	current Yield = preferred dividend/market price	8% = 50000/market price	50000/8%	625000
cost of common stock	(expected dividend/market price)+growth rate	(1.5/14.25)+6%	16.53%
after tax cost of debt	YTM*(1-tax rate)	10*(1-.4)	10*(1-.4)	6
Source		market value	weight	cost	weight*cost
debt	8000*863.73	6909840	0.304098962	6	1.82459377
preferred stock		625000	0.02750597	8	0.22004776
common stock	750000*14.25	10687500	0.470352085	16.53	7.77491997
retained earning		4500000	0.198042983	16.53	3.27365051
total		22722340	WACC = sum of weight*cost		13.09