Question

The Carla Vista Products Co. currently has debt with a market value of $225 outstanding the debt consists of percent coupon bonds semiannual coupon payments which have a maturity of 15 years and are currently priced at $1.440.03 per bond. The firm has an issue of 2 million preferred shares outstanding with a market price of $13 per share. The preferred shares pay an annual dividend of $120. Carla Vista also has 14 million shares of common stock outstanding with a price of $20,00 per share. The form is expected to pay a $2.20 common dividend one year from today and that dividend is expected to increase by 5 percent per year forever, Carla Vista is subject to a 60 percent marginal tax rate, then what is the firm's weighted average cost of capital? Excel Template (Note: This template includes the problem statement as it appears in your textbook. The problem assigned to you here may have different values. When using this template, copy the problem statement from this screen for easy reference to the values you've been given here, and be sure to update any values that may have been pre-entered in the template based on the textbook version of the problem.) x Your answer is incorrect Calculate the weights for debt.common equity, and preferred equity (Round intermediate calculations and final answers to 4 decimal places,.. 1.2514.) Debt Preferred equity Common equity e Textbook and Media X Your answer is incorrect. Calculate the cost of debt (Round intermediate calculations to 4 decimal places 1.2514 and final answer to 2 decimal places, s. 15.25 Cost of debt 200

Answer 1

rate positively ..

Computation of weight
Source		Market value	weight
Debt		225000000	42.37%
prferred stock		26000000	4.90%
common equity		280000000	52.73%
		531000000
Note: in 2nd question we only need cost of debt and not post tax cost of debt . But for WACC we have to use post tax cost of debt
Computation of cost of debt
we have to use financial calculator to solve this
put in calculator -
FV		1000
PV		-1440.03
PMT	1000*9%/2	45
N	15*2	30
Compute I		2.42%
Annual rate =2.42%*2		4.84%
Post tax cost of debt = 4.84%*(1-40%)				2.90%
<< Note: As you already have computed Cost of eqiuty and preferred stock I am not doing double calculation here>>
Computation of WACC
Source		Weight	Cost
Debt		42.37%	2.90%	1.23%
prferred stock		4.90%	9.23%	0.45%
common equity		52.73%	16%	8.44%
				10.12%
WACC=				10.12%