9,200 6.4 percent coupon bonds outstanding, with 23 years to maturity and a quot

Question

9,200 6.4 percent coupon bonds outstanding, with 23 years to maturity and a quoted price of 104.5. These bonds pay interest semiannually.

235,000 shares of common stock selling for $64.70 per share. The stock has a beta of .87 and will pay a dividend of $2.90 next year. The dividend is expected to grow by 5.2 percent per year indefinitely.

What is the firm's cost of each form of financing? (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).)

Calculate the WACC for Parrothead Enterprises. (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Explanation / Answer

1. Calculation of Cost of Debt:

YTM of Bonds: Bond Price = Par Value x Coupon Rate x 1 - (1 + r)^-mxn / r + Par Value / (1 + r)^mxn

YTM = 100 x 3.2% x 1 - (1 + 0.032)^-2x23 / 0.032 + 100 / (1 + 0.032)^2x23

YTM = 6.04%

2. Calculation of Cost of Equity:

As per CAPM = rf + Beta (rm - rf)

Cost of Equity = 5.2 + 0.87 (11.8 - 5.2) = 10.94%

According To dividend Growth model: Price = D1 / k - g

D1 = Dividend next year = 2.90 x 1.052 = 3.0508

k = Cost of Capital = X, g = Growth Rate = 5.2%, Price = $64.70

64.70 = 3.0508 / X - 0.052

64.70 (X - 0.052) = 3.0508

64.70X - 3.3644 = 3.0508

X = 9.92%

Cost of Equity = 10.94 + 9.92 / 2 = 10.43%

3. Cost of Preferred Stock = 4.6 / 94.20 = 4.88%

Related Questions

Navigate

• Browse (All)
• Browse 9
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.