Question

Hankins Corporation has 7.6 million shares of common stock outstanding, 280,000 shares of 4.5 percent preferred stock outstanding, par value of $100; and 165,000 bonds with a semiannual coupon rate of 5.9 percent outstanding, par value $2,000 each. The common stock currently sells for $61 per share and has a beta of 1.15, the preferred stock has a par value of $100 and currently sells for $95 per share, and the bonds have 19 years to maturity and sell for 109 percent of par. The market risk premium is 71 percent, T-bills are yielding 3.5 percent, and the company's tax rate is 25 percent. a. What is the firm's market value capital structure? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., 1616.) b. If the company is evaluating a new investment project that has the same risk as the firm's typical project, what rate should the firm use to discount the project's cash flows? (Do not round intermediate calculations enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Debt Preferred stock Equity b. Discount rate 0.5455 0.4232 0.0313 8.15%

Answer 1

Risk free Rate Market premium Rf Rm-Rf Preference Face value preference dividend Market price Cost of preference shares 100 4.5 Equity CAPM Ke 95 Rf+Beta*(Rm-RE) 0.035+1.15*(0.071) 0.11665 11.67% Debt Coupon nper pmt PV fv Rate YTM 38 19*2 29.50 1000*5.9%*1/2 (1,090.00) 1000*109% 1,000.00 RATE(38,29.50,-1090,1000) 2.576% 2.576%*2 5.152% (4.5/95) 0.0474 4.74% product Debt L 165000*1090 280000*95 7600000*61 Market value 179,850,000.00 26,600,000.00 463,600,000.00 670,050,000.00 weight 0.2684 0.0397 0.6919 After tax debt 0.05152*(1-0.25) preference Equity 0.038637 $ $ $ $ 3.86% cost 0.0386 0.0474 0.1167 WACC WACC 0.0104 0.0019 0.0807 0.0930 9.30% b) Discount rate WACC 0.0930 0.0930 9 .30% 9.30%