Question

3 The ACME Toy Company has the following information. Computer the cost of capital for each. a. It has $1,000 par value bond with a 9% annual coupon rate and a 20 year maturity. The investors require a 11% rate of return. Compute the market value of the bonds and the after-tax cost if the tax rate is 21% and you can buy the bond for $1,100 3 b. ACME's common stock paid a $1.40 dividend last year. In addition, their dividends are growing at 6% per year. The price of this stock is currently $100.00. Compute the cost of this capital. 1 c. ACME's preferred stock is payinng a 8% dividend on a $100 par value. The market price of shares is currently 2 $90.00/share. Compute the cost of this capital. 4 d. Using the information above and the balance sheet info below, compute the WACC. Liabilities and Equity Accounts Payable Long Term Debt Preferred Stcok Common Stock 00 ONM $ $ $ $ $ 45,000 1,000,000 500,000 2,000,000 3,545,000

Please, solve it with the formula in Excel. Thank you

Answer 1

Η 27 28 29 30 31 32 33 a) nper (i.e. time to maturity) pmt (i.e. annual coupon) pv (i.e current bond price) fv (i.e Par value) 90 -1100 1000) rate (i.e. Yield to maturity) 7.98% 35 tax rate 21% After-tax cost of debt 6.31% Market value of bonds 1100000 39 40 41 42 1.4 6% 100 43 b) 44 Last year dividend 45 growth rate 46 Stock price 47 48 Cost of equity 49 50 51 c) 52 Annual dividend 53 Current price 7.48% 901 Cost of preferred stock 8.89%

K H 56 57 d) 58 59 Debt Preferred Stock 61 Common Stock Total 63 64 WACC 65 Book Value Weight 1000000 0.2857143 500000 0.1428571 2000000 0.5714286 35000001 Cost 6.31% 8.89% 7.48% 60 62 7.35%

28 27 a) nper (i.e. time to maturity) 29 pmt (i.e. annual coupon) 30 pv (i.e current bond price) 31 fv (i.e Par value) 32 33 rate (i.e. Yield to maturity) 34 tax rate 20 =1000*9% -1100 1000 =RATE(J28,129,130,131) 0.21 After-tax cost of debt =J33*(1-J35) 39 Market value of bonds=1000*1100 40 41 1.4 42 43 b) 44 Last year dividend 45 growth rate 46 Stock price 47 Cost of equity 49 0.06 100 48 =(J44*(1+J45)/146)+J45 50 51 c) 52 53 54 Annual dividend Current price =100*8% 90 55 Cost of preferred stock |=352/353

K AH 57 d) Cost 60 Debt Preferred Stock Common Stock Total Book Value 1000000 500000 2000000 =SUM(J59:J61) Weight =J59/J62 =J60/J62 =J61/362 =SUM(K59:K61) = 137 =J55 =348 61 62 WACC =(L59*K59)+(L60*K60)+(L61*K61)