Question

Hankins Corporation has 8.4 million shares of common stock outstanding, 590,000 shares of 7.4 percent preferred stock outstanding, and 184,000 of 8.6 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $64.90 per share and has a beta of 1.29, the preferred stock currently sells for $107.10 per share, and the bonds have 13 years to maturity and sell for 91.5 percent of par. The market risk premium is 7 percent, T-bills are yielding 5.7 percent, and the firm’s tax rate is 35 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., 32.1616.)
  

Market value weight of debt
Market value weight of preferred stock
Market value weight of equity

b. If the firm 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 and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
  
Weighted average cost of capital               %

Answer 1

Coupon Rf+beta*(Rm-Rf) Preference Кe 0.057+1.29*(0.07) nper pmt 26 13*2 Face value 100 43.00 1000*8.6%*1/ 2 (915.00) 1000*91.5% preference dividend Market price $ 7.4 0.1473 Cost of Equity 14.73% PV $ 107.1 fv Cost of preference shares (7.4/107.1) 1000 0.07 RATE(26,43,-915, 1000) Rate 6.91 % 4.884% 9.769% YTM 4.884% 2 Market value product weight a) Market value cost $168,360,000.00 $ 63,189,000.00 After tax cost of debt 0.0635 Debt 184000 915 0.21676 0.0138 preference Equity 0.09769*(1-0.35) 6.350% 590000*107.10 0.08135 0.0691 0.0056 8400000*64.90 0.1473 545,160,000.00 0.70188 0.1034 776,709,000.00 0.122772 WACC WACC 12.28% b) Discount rate 12.28% WACC