Question

13.24 WACC: The Imaginary Products Co. currently has debt with a market value of $300 million outstanding. The debt consists of 9 percent coupon bonds (semiannual coupon payments) which have a maturity of 15 years and are currently priced at $1,440.03 per bond. The firm also has an issue of 2 million preferred shares outstanding with a market price of $12.00 per share. The preferred shares pay an annual dividend of $1.20. Imaginary also has 14 million shares of common stock outstanding with a price of $20.00 per share. The firm is expected to pay a $2.20 common dividend one year from today, and that dividend is expected to increase by 5 percent per year forever. If Imaginary is subject to a 40 percent marginal tax rate, then what is the firm's weighted average cost of capital?

Answer 1

fix X =+C165/$C$174 D165 А В C D E Market WACC (Cost value %xWeights) 164 After-tax cost% Market value weights 165 Common equity 16.00% $ 6.09% 280,000,000 0.3804 166 -2.2/20+5% -14000000*20 167 168 Preferred stock 10.00% $ 0.0326 0.33% 24,000,000 =1.2/12 169 -2000000*12 170 2.90% $ 171 Bonds 0.5870 1.70% 432,009,000 -RATE (15*2,90/2,-1440.03,1000,0)*2*(1-40%) 300000*1440.03 172 173 Total 174 736,009,000 1.0000 175 8.12% (WACC) 176 Weighted average cost of capital

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