Question

A company has a marginal cost of equity at 14.55%, while it pays a dividend of 11% on its preferred stock, with an interest payout on a per bond basis of $75.95 annually on a semi annual basis. The company is 59% equity (common stock) funded, and 12% funded by preferred stock. The applicable corporate tax rate is 25%. Please find the WACC of this company. 6. 7. Based on the following mean expected returns and the related standard deviations, and using coefficient of variation as your final arbiter in the decision-making process which of the following investment positions would you take listing them in order from best to worst? Companies Mean Expected Return Standard Deviation Coefficient of Variation Order Abercromb BioTechnic Capistrano Delco Fox 10.23% 15.82% 9.47% 13.14% 18.35% 20.45% 32.11% 27 81% 22.38% 29.62%

Answer 1

6)	Component	Cost	Weight	WACC
	Cost of common stock (given)	14.55%	59.00%	8.58%
	Cost of preferred stock	11.00%	12.00%	1.32%
	Cost of debt = 7.595*(1-25%) =	5.70%	29.00%	1.65%
	WACC =			11.56%
7)	Companies	Mean Expected Return	SD	COV	Order
	Abercromby	10.23%	20.45%	2.00	3
	BioTechnic	15.82%	32.11%	2.03	4
	Capistrano	9.47%	27.87%	2.94	5
	Delco	13.14%	22.38%	1.70	2
	Fox	18.35%	29.62%	1.61	1
	Note: Covariance [COV] = Standard Deviation/Mean expected return.
	Order of ranking:
	The security with the least COV would Rank 1, as COV is an indication of riskiness
	of a security in relation to its mean. Rank 2 would be given to the security having
	the next highest COV. So Fox would have Rank 1 and Delco would have Rank 2.
	The worst rank will be for Capistrano, which has the highest COV of 2.94.