Question

You are given the following information on Parrothead Enterprisesi Debt 9,300 74 percent coupon bonds outstanding, with 21 years to maturity and a quoted price of 108.75. These bonds pay interest semiannually and have a par value of $2,000 Common stock. 320,000 shares of common stock selling for $66.40 per share. The stock has a beta of 109 and will pay a dividend of $4 60 next year. The dividend is expected to grow by 5.4 percent per year indefinitely Preferred stock: 9.900 shares of 4.7 percent preferred stock selling at $95 90 per share. The par value is $100 per share. Market risk-free rate of 4.55 percent, and a 24 101 percent expected retum percent tax rate Calculate the company's WACC. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) WACC

Answer 1

Debt Face value of bond = $2,000 Current price of bond = Face value * 108.75% = $2,175 Term = 21 Years * 2 = 44 Periods Coupon rate = 7.4%*6/12 = 3.7% Per period Coupon amount = Face value * Coupon rate = $2,000 * 3.7% = $74 Per period YTM of bond = [Coupon amount + (Maturity value - Current price ) /Term] /[ 0.6 * Current price + 0.4*Maturity value] = [ $74 + ($2,000 - $2,175)/44]/[0.6 *$2,175 +0.4*$2,000 ] = $70.0227273 / $2.105 = 0.03326495 = 3.326495% Per period YTM = 3.326495 % Per period * 2 = 6.65299 % Per annum After tax cost of debt. Kd = 6.65299%*(1 - 24%) = 5.0562724 % Per annum Total market value of bonds = 9,300 bonds * $2,175 Per bond = $20,227,500

Common stock Beta of stock = 1.09 Risk free rate. Rf = 4.55 % Market return, Rm = 10.1 % Cost of common stock, Kc = Rf+ Beta * (Rm - Rf) = 4.55 % + 1.09 * (10.1 %-4.55%) = 10.5995 % Current price of stock, PO = $66.40 Expected dividend D1 = $4.60 Growth rate, g = 5.4 % Cost of common stock equity = (D1 /PO) + g = ($4.60 / $66.40) + 5.4% = 0.06927711 +0.054 = 0.12327711 = 12.327711% Average cost of equity. Ke = (10.5995 % + 12.327711 %)/2 = 22.927211 %/2 = 11.4636055 % Market value of common stock = 320,000 shares * $66.40 = $21,248,000

Total market value of firm = $20,227,500 + $21,248,000 + $949.410 = $42.424,910 Weight of debt, Wd = $20,227,500 / $42.424,910 = 0.47678357 Weight of common stock, Wc = $21.248.000 / $42,424,910 = 0.50083783 Weight of preferred stock, Wp = $949.410 / $42.424,910 = 0.0223786 WACC = wd* Kd+Wc * Kc + Wp * Kp = 0.47678357* 5.0562724 % + 0.50083783 * 10.5995 % +0.0223786 * 4.900938 % = 7.82905433 % = 7.83 % (Rounded) Ans : WACC = 7.83%