Source of Capital Market Values Bonds $3,600,000 Preferred Stock $1,800,000 Comm

Question

Source of Capital Market Values
Bonds $3,600,000
Preferred Stock $1,800,000
Common Stock $6,100,000

To finance the purchase, RM will sell 10-year bonds paying 7.1% per year at the market price of $1,058. Preferred stock paying a $1.92 dividend can be sold for $25.73. Common stock for RM is currently selling for $54.32 per share and the firm paid a $3.06 dividend last year. Dividends are expected to grow at a rate of 4.8% per year into the indefinate future. If the firms tax rate is 30% what is RM's WACC _______%

Explanation / Answer

Calculation of cost of debt $1,058 =71/(1+r)+71/(1+r)^2 ....1071/(1+r)^10 r =6.30% Calculation of cost of preferred stocks $25.73 =$1.92/rp rp=$1.92/$25.73 =7.46% Calculation of cost of equity $54.32=$3.06*(1+4.8%)^2/(re-4.8%) re=10.99% Value of Bonds =$3,600,000*$1,058= $3,808,800,000 Preferred Stock =$1,800,000*$25.73= $46,314,000 Common Stock $6,100,000*$54.32= $331,352,000 Total value = $4,186,466,000 WACC = $3,808,800,000/$4,186,466,000*6.30%*(1-30%) +$46,314,000/$4,186,466,000*7.46% + $331,352,000/$4,186,466,000*10.99% =4.965%

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