1. Burkina Faso Corporation stockholders expect a growth rate of 4% in the compa
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Question
1. Burkina Faso Corporation stockholders expect a growth rate of 4% in the company, and a dividend of $2.60 next year. The WACC of Burkina Faso is 10.3%. There are 3.5 million shares of the common stock, selling at $29 per share. The company also has $65 million face value zero-coupon bonds, which will be due after 7 years. The bondholders have a required rate of return of 6%. Find the tax rate of Burkina Faso.
2. Burundi Co has the following capital structure. It has 15 million shares of common stock selling for $18 each. The stock will pay a dividend of $2.25 next year and this dividend is expected to grow at the rate of 4% annually. Burundi has just raised $90 million by selling 8% coupon bonds at par. Burundi also has 2.5 million shares of preferred stock, which pays a dividend of $1.40 annually, and the preferred shareholders have a required rate of return of 11%. Burundi has 31% income tax rate. Find theWACC of Burundi.
3. Cameroon Corporation has the following capital structure: $66 million (face value) of 7% bonds, which are selling at 92 and maturing after 10 years; 12 million shares of common stock selling at $11 each; and 1.1 million shares of preferred stock selling at $9 each and paying an annual dividend of $1.30. The ? of the stock is 1.37 whereas the expected return on the market is 11%. The risk-free rate is 3% and the company's tax rate is 34%. Find the WACC of Cameroon.
4. Cape Verde Corporation has debt/assets ratio of .33, its cost of debt is 7.6% and that of equity 12%. The tax rate of Cape Verde is 31%. The company is not growing and it has a dividend payout ratio of 100%. Its dividend per share is $2.50. Cape Verde has 2.75 million shares of common stock. Find the total value of Cape Verde, and its WACC.
PLEASE SHOW ALL WORK AND STEPS
Explanation / Answer
1) WACC = (E/E+D)*Cost of Equity + (D/E+D)*(1-T)*Cost of Debt
T = 1 - [ { WACC - (E/E+D)*Cost of Equity }/ ( ( 1 - E/E+D ) )*Cost of Debt ]
PV( D ) = 65 million/(1+0.06)^7 = $43.2287
Cost of Debt = 0.06
From DDM
Cost of Equity = [ D(1)/P(0) ] +g = ( 2.6/29 ) + 0.04 = 0.1296
E/(E+D) = 3.5*29/(3.5*29 + 43.2287) = 0.7013
T = 1 - [ { 0.103 - 0.7013*0.1296 }/{ (1-0.7013 )* 0.06 } ] = 0.3242 = 32.42%
2) Cost of Equity = [ D(1)/P(0) ] +g = ( 2.25/18 ) + 0.04 = 0.165
PV( D ) = 90 million
Cost of Debt = 0.08
Cost of Preferred stock = 0.11
PRice of preferred stock = Dividend/Require return = 1.4/011 = $12.73
WACC = (CE/(CE+PE+D))*Cost of Equity + (PE/ (D/(CE+PE+D))*Cost of Preferred Equity +(D/(CE+PE+D))(1-T)*Cost of Debt
WACC = 0.6890*0.165 + 0.0812*0.11 + 0.2296*0.69*0.08 = 0.1352 = 13.52%
3)Cost of Equity = RFR + beta*(MR-RFR) = 0.03 + 1.37*(0.11-0.03) = 0.1396
Number of preferred shares = 66000000/100 = 0.66 million shares
D = 0.66*92 = $60.72 millions
Cost of preferred equity = 1.3/9 = 0.1445 , Cost of Debt = [ (100/92)^(1/10) ] - 1 = 0.083730
WACC = (CE/(CE+PE+D))*Cost of Equity + (PE/ (D/(CE+PE+D))*Cost of Preferred Equity +(D/(CE+PE+D))(1-T)*Cost of Debt
WACC = 0.651465*0.1396 + 0.0488599*0.1445 + 0.299674*0.083730*0.66 = 0.11383 = 11.45%
4) P = D/Cost of Equity = 2.5/0.12 = $20.83
E = P*No. of shares = 20.83*2.75 million = $57.2825 million
E/A = 0.67
Company value A = E/0.67 = 57.2825/0.67 = $85.4962 million
WACC = (E/A)*Cost of Equity + (D/A)*(1-T)*Cost of Debt
E/A = 1 - D/A = 0.67, Cost of Equity = 0.12 , Cost of Debt = 0.076 , T = 0.31
WACC = 0.67*0.12 + 0.33*0.69*0.076 = 0.09770 = 9.77%
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