Question

3. Consider Higgins Production which has the following information about its capital structures:

Debt - 4,500, 5 percent coupon bonds outstanding, $1,000 par value, 7 years to maturity, selling for 80 percent of par, the bonds make semi-annual payments.

· Common Stock - 100,000 shares outstanding, selling for $35 per share; the beta is 1.20.

· Preferred Stock - 19,000 shares of 6 percent preferred stock outstanding, currently selling for $150 per share.

· Market Information - 6 percent market risk premium and 4 percent risk-free rate.

Required: Calculate to the following if the company has a tax rate of 36 percent.

1. Total Market Value for the Firm
2. After-tax cost of Debt
3. Cost of Equity
4. Cost of Preferred Stock
5. Weighted Average Cost of Capital

Answer 1

i) Total market value of the firm market value = value of debt Value of common stock value of Prafered stock = 4500 1960 150 1000 807. 1,00,000® 35 = 28,50,000 36,00,000 35,00,000 € = 99,50,000 i) After cost of debt (kd) = cost of debt ® CI-Tary.) – 57 ® (1-367.) Scanned with CamScanner 3.27

cost of Equity Ke = Rp t FCRM -RF) ke = cost of equity RE= Risk free rate . Rn-Rp = Risk fremium NOW ke=47. 01. 20 (6%) 6 7.2% = 47. = 11.27 cost of Preferred stock iv) Kp = 0 2 kp= 100x6%. iso kp a cost of Preferred stock - D= Dividend Pa price of Preferred stock. Scanned with fare value assumed of 100 " = 45

nital ( WACC) u weighted average cost of capital (WACC) un Debt Debt K, WACC = Ke Equity ok. 0 Preferred stock valuer value value 3.2% = 112® 36,00,000 @ 47 35,00,000 99,50,000 BUT 99159.000 28, 50,000 99,50,000 = 11.2% ® 0.362 € 47.00.352 ® 3.27.0 0.286 = 638 7. atronist all and anong I WACC = 6.38 1. Scanned with CamScanner