Question

Question Completion Status: Debt 20 bonds with 8 % coupon rate, payable annually, 51.000 par value, 15 years to maturity, selling at 5970 per bond. 500 shares of common stock outstanding. The stock sells for a price of 5112 per share and has a beta of 1.6 Common Stock Preferred Stock 110 preferred shares outstanding, currently trading at $120 per share with a annual dividend payment of 57 Market The market risk premium is 996 and the risk free rate is 2% Tax Rate 2196 Calculate WACC? Do(1+9) +9 Cost of common equity: K. Pes Return or Cost of common equity: E() = r; +B[E(rm) - ry] Cost of Preferred Stock: Tips Dps Value of Preferred Stock WACC = W. *K.(1-T) + W. * K + Wys * Kps

Answer 1

All the calculations are based on above formulas given;

Cost of common equity=ke= 2+1.6*9 =16.4%

cost of preferred shares=kp= 7/120 =5.83%

cost of debt= YTM of the bond and can be calculated as below;

Using excel; cost of debt= kd=YTM= "=rate(15,80,-970,1000)" =8.36%

Value of debt=D=20*970=19400

Value of common equity=E=500*112 =56000

Value of preferred equity=P=110*120=13200

Firm Value=V=D+E+P =19400+56000+13200 =88600

WACC= (E/V)*ke+(P/V)kp+(D/V)*kd*(1-tax rate)

= (56000/88600)*16.4 +(13200/88600)*5.83+(19400/88600)*8.36*(1-.21)

=12.68% ---option D