Calculate the WACC for Martin Industries given: A tax rate of 34%, the market re
ID: 2474963 • Letter: C
Question
Calculate the WACC for Martin Industries given:
A tax rate of 34%, the market return is 13.2% and the risk-free rate is 4.5%.
7,500 preferred stock shares selling at $88/share with a 6% dividend rate.
265,000 common shares outstanding selling for $76/share. The stock has a beta of 0.92 and will pay a dividend of $2.48 next year. The dividend is expected to grow by 4% per year indefinitely.
8,500 coupon bonds outstanding with a 7.1% coupon rate and 14 years to maturity. The quoted price is 102.6. Interest is paid semiannually.
Explanation / Answer
Answer:
Cost of Equity (As per CAPM Method) = Risk Free Return + Beta (Market Return - Risk Free Return)
= 4.5% + 0.92 (13.2% - 4.5%)
= 4.5% + 8.004%
= 12.50%
Cost of Preferred Stock = Preference Dividend / Net Proceeds x 100 = $6 / 88 x 100 = 6.82% (Assumed par value of share $100 each)
Cost of Debt after tax = [ Annual Coupon Interest (1 - Tax Rate) + (Redemption Value - Net Proceeds) / life ] / (Redemption Value + Net Proceeds)/2
= [ $7.1 (1 - 0.34) + ($100 - $102.6)/14 ] / ($100 + $102.60)/2
= ($4.686 - $0.1857) / $101.30
= 0.044425 or 4.44%
Caculation of WACC at Market Weight
Capital Structure
Market Value
Market Weight
Cost of Capital (%)
WACC
(Market Weight x Cost of Capital)
Common Stock (265,000*76)
$20,140,000
0.929
12.5
11.62
Preferred Stock (7,500*88)
$660,000
0.030
6.82
0.21
Debt (8,500*102.6)
$872,100
0.040
4.44
0.18
$21,672,100
12.00
WACC = 12%
Capital Structure
Market Value
Market Weight
Cost of Capital (%)
WACC
(Market Weight x Cost of Capital)
Common Stock (265,000*76)
$20,140,000
0.929
12.5
11.62
Preferred Stock (7,500*88)
$660,000
0.030
6.82
0.21
Debt (8,500*102.6)
$872,100
0.040
4.44
0.18
$21,672,100
12.00
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