Source of Capital Market Values Bonds $3,800,000 Preferred Stock $1,700,000 Comm

Question

Source of Capital Market Values
Bonds $3,800,000
Preferred Stock $1,700,000
Common Stock $6,200,000

RM will sell 10 year bonds paying 6.8% per year at the market price of $1,066. Preferred stock paying a $1.98 dividend can be sold for $25.76. Common stock for RM is currently selling for $54.15 per share and the firm paid a $2.91 dividend last year. Dividends are expected to continue to grow at at rate of 5.3$ per year into the indefinite future. If the firm's tax rate is 30%, RM's WACC is ________%(Round to three decimal places)

Explanation / Answer

Calculation of cost of debt $1066 =68/(1+r) +68/(1+r)^2 +68/(1+r)^3 ....1068/(1+r)^10 r=5.907% Value of bond=$3,800,000*$1066= $4,050,800,000 Calculation of cost of preferred stock $25.76=$1.98/rp rp=7.686% Value of Preferred Stock= $1,700,000*$25.76= $43,792,000 Calculation of cost of equity $54.15=$2.91*(1+5.3%)^2/(re-5.3%) re=11.26% Value of equity =$6,200,000 *$54.15 = $335,730,000 Total value = $4,430,322,000 WACC =($335,730,000*11.26% +$43,792,000*7.686%+$4,050,800,000*5.907%*(1-30%))/$4,430,322,000 =4.710%

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