Question

Calculate the WACC which represents the "hurdle rate" for a typical project with average risk using the average of the range of the marginal cost of common equity using retained earnings or new earnings. Data: A 15-year, 12% coupon, semiannual payment non-callable bonds sell for $1,153.72. New bonds will be privately placed with no flotation cost.. A 10%, $1,000 par value, annually dividend, perpetual preferred stock sells for $1,111. Both an existing common stock and a new common stock issue, which incurs a flotation cost of 15% of the proceeds, sells for $50. D. - $4.3995 and g = 5%. b - 1.2: r. -7%; RP - 6%. Bond-Yield Risk Premium = 4% Target capital structure: 20% debt, 20% preferred, 60% common equity. Tax rate is 35%.

Answer 1

Ans - Cost of debt is calculated through financial calculator. We ca also calculate YTM by hit and trial method. When current price is more than par value , the coupon rate is always higher than YTM and vice versa. In this case Coupon rate is 12% so YTM should be less than 12%.

Preferred stock cost is given 10%. Its like a combination of debt and equity.

Cost of equity has been calculated thorugh CAPM ( Capital asset pricing model)

we can also calculate through dividend discount model by usin followig equation:

price = D₁ / r- g

CALCULATOR We (AN CALCULATE Y FINANCIAL Ans UsINe 1 CI153 78) Pv= 1000 Fr= PNT Coupen) I 6/ demi -annually 01 30 15X2 15 yeaus T = Sermionnually 01 CPT, THEN YTM= 101 annualy C Paoporwred 107 stock cost

equity Cost Rf+ 6(RP) 7+ 7.8 of fenity 0a (0ct) C-t) t 02 (padleued)+ WACE 0a (1o 1) (-0 35) t00 (101) to-6 ( 14:31-) +9 14-8 1-3 181 1