Question

Problem 3 (10 marks) Husky Manufacturing Inc. currently has $15,000,000 in bonds outstanding with a coupon rate of 5% that is paid semi-annually. The bonds will mature in 5 years are currently selling at a quoted price of 92. The company also has 30,000 shares of 7% preferred stock outstanding currently selling for $95 per share with a par value of $100. In addition, the company has 500,000 common shares outstanding selling for $60 per share and with a book value of $30. The firm has a tax rate of 40%, a beta of 1.2, an ROE of 10%, and a dividend payout ratio of 20%. The firm has no internally generated funds available. The market risk premium is 5% and the risk-free rate is 4%. Ignore flotation costs. a) Calculate the before-tax cost of debt. (3 marks) b) Calculate the cost of preferred shares. (2 marks) c) Calculate the cost of common equity. (2 marks) d) Husky plans on using the following capital structure weights. Calculate the WACC? (3 marks) Source Weights Debt 45% Preferred 10% Common 45% Total 100%

Answer 1

DATE Answer (w Before tax cost of Debt Ru (-) Bo YTM = Coupon Hi (Rv et Bo Ru= Redeemable Value Bo = price of Rand no years to maturity YTM $100 (X) 51.600) S1.11 Ct) $ loo G $92 SK2 100 (4) 92 2 ) 2 YTM 2.5 to 10.00 ] 3.43754. (semi Annuel] Amuel YTM= 262 3.43754. 6.8751 (a) Before tax cost of Debt = 6.8754. (b) Cost of preference shares kp Anneal Dividend $ loo W7). $95 price for share kg7.3687 Cost thower Scanned with CamScanner of preference shares 7:3684

DATE C Cost of Common Equity ² ke- ff to Beta Elm (-) of) (As per Carm) kes 4% (t) 1.20(54) le = 104 cost of common Equity = 10%. d NACC WACC = Welas ke tt) We arka x C1-tax) A) Wy ookp NACO = 8.45 (x) 10% (t) 0.45 6.875%.(x (1-40%) (t) 0.10 (x) 7.368% 4.50% (+) 1.85625% to 0.7368% 7.0937 Ansuet WACC = 7:0937 cs Scanned with Eamscanner