Question

The Imaginary Products Co. currently has debt with a market value of $275 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 $1,181.85 per bond. The firm also has an issue of 2 million preferred shares outstanding with a market price of $12. 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 7 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?

Calculate the Weights for debt, common equity, and preferred equity. (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.) Debt % Preferred equity % Common equity % LINK TO TEXT

Calculate the cost of debt. (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.) Cost of debt % LINK TO TEXT

Calculate the cost of preferred equity. (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.) Cost of preferred equity % LINK TO TEXT

Calculate the cost of common equity. (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.) Cost of common equity % LINK TO TEXT

What is the firm’s weighted average cost of capital? (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.) WACC % Click if you would like to Show Work for this question: Open Show Work

Answer 1

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SOLVED WITH BA II PLUS CALCULATOR

Q C w ENG 01:38 21-07-2020 99+ 35 Х A04 > AN АО AP AR AS AT AU AV AW AX AY AZ AQ NUMBER 4 SOURCE VALUE PRICE Q 5 P p*Q 6 275 DEBT EQUITY PREFERRED STOCK 7 WEIGHTS WEIGHTS DECIMALS % 0.4750 47.50% 0.4836 48.36% 0.0415 4.15% 1.0000 14 20 280 24 8 2 12 579 9 10 11 ANS 1 12 DEBT PREFERRED EQUITY COMMON EQUITY 47.50% 4.15% 48.36% 13 14 15 16 financial calculator strokes first of all FOR YTM BOND 17 18 set 2 C/Y = P/Y 2 19 20 then N = PV = PMT= 21 22 23 24 25 26 30 (15 X 2] 1181.85 -45 [1000 X 9.0%/2] -1000 7.0200% FV = 1/Y = CPT 27 ANS 2 COST OF DEBT = 7.0200% PV FVstate Sheet4 PV FV PRICE YTM choice CON REFIN DIFF EAR nper WACC YIELD HERO WACC Sheet2 PREF STOCK Sheet5

Q C w ENG 01:38 21-07-2020 99+ 35 Х A026 < . AN АО AP AQ AR AS AT AU AV AW AX AY AZ 26 ANS 2 COST OF DEBT = 7.0200% 27 28 29 30 31 COST OF PREFERRED STOCK kp = DIVIDEND/ PRICE kp = 1.2/12 = ANS 3 10.0000% 32 33 34 COST OF EQUITY ke = ke = 35 36 D1/PO+g 2.20/20 + 0.07 18.000% ANS 4 ke = 37 38 AFTER TAX COST OF DEBT = 7.0200%*(1-0.40) = 4.2120% 39 40 CALCULATION OF WACC 41 42 SOURCE WEIGHTS 43 44 A coc(%) WEIGHTED COST B A*B 4.2120% 2.00% 18.0000% 8.70% 10.0000% 0.41% 45 DEBT 0.4750 46 EQUITY PREFERRED STOCK 0.4836 0.0415 47 48 1.0000 49 ANS 5 WACC = 11.12% PV FVstate Sheet4 PV FV PRICE YTM choice CON REFIN DIFF EAR nper WACC YIELD HERO WACC Sheet2 PREF STOCK Sheet5