Question

You are given the following information on Parrothead Enterprises:
Debt:	9,400 6.6 percent coupon bonds outstanding, with 21 years to maturity and a quoted price of 105. These bonds pay interest semiannually and have a par value of $1,000.
Common stock:	245,000 shares of common stock selling for $64.90 per share. The stock has a beta of .94 and will pay a dividend of $3.10 next year. The dividend is expected to grow by 5.4 percent per year indefinitely.
Preferred stock:	8,400 shares of 4.7 percent preferred stock selling at $94.40 per share. The par value is $100 per share.
Market:	11.6 percent expected return, risk-free rate of 3.8 percent, and a 24 percent tax rate.

Calculate the company's WACC.

Answer 1

As per CAPM ke Rf+beta(Rm-Rf) 0.038+0.94-(0.116-0.038) 0.11132 11.13% expected return As per Dividend discount Model Ке (D1/PO)+g (3.10/64.90)+0.054 0.101765794 10.18% Cost of Equity Is taken as Average of above two Cost of Equity Preference Face value preference dividend Market price Cost of preference shares 100 4.7 94.4 4.7/94.40 (0.1113+0.1018)/2 0.106542897 10.65% Coupon nper pmt PV 42 212 331000*6.6% 1/2 -1050 1000 105% 1000 RATE(42,33,-1050,1000) 3.086% 3.086% 2 6.172% Best Estimate Cost 0.049788136 4.98% 10.65% 10.65% Rate YTM Debt preference Futu 9400*1050 8400*94.40 245000*64.90 Market value $ 9,870,000.00 $ 792,960.00 $ 15,900,500.00 S 26,563,460.00 After tax debt 0.06172*(1-0.24) 0.046907053 weight cost product 0.372 0.046907053 0.0174 0.030 0.049788136 0.0015 0.599 0.106542897 0.0638 WACC 0.0827 WACC 8.27%)