Vedder, Inc., has 7.6 million shares of common stock outstanding. The current sh
ID: 2635527 • Letter: V
Question
Vedder, Inc., has 7.6 million shares of common stock outstanding. The current share price is $62.60, and the book value per share is $5.60. Vedder also has two bond issues outstanding. The first bond issue has a face value of $71.6 million, a coupon rate of 7.1 percent, and sells for 90 percent of par. The second issue has a face value of $36.6 million, a coupon rate of 8.1 percent, and sells for 89 percent of par. The first issue matures in 21 years, the second in 13 years. The most recent dividend was $3.65 and the dividend growth rate is 7 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 34 percent.
What is the company
Vedder, Inc., has 7.6 million shares of common stock outstanding. The current share price is $62.60, and the book value per share is $5.60. Vedder also has two bond issues outstanding. The first bond issue has a face value of $71.6 million, a coupon rate of 7.1 percent, and sells for 90 percent of par. The second issue has a face value of $36.6 million, a coupon rate of 8.1 percent, and sells for 89 percent of par. The first issue matures in 21 years, the second in 13 years. The most recent dividend was $3.65 and the dividend growth rate is 7 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 34 percent.
Explanation / Answer
cost of the first bond
71.6*.9 = 71.6*.071/2*PVIFA(i/2,42) + 71.6*PVIF(i/2,42) = 71.6*.071/2*(1-(1+i/2)^(-42))/(i/2) + 71.6*(1+i/2)^(-42)
i = 8.0983%
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cost of the second bond
36.6*.89 = 36.6*.081/2*PVIFA(i/2,26) + 36.6*PVIF(i/2,26) = 36.6*.081/2*(1-(1+i/2)^(-26))/(i/2) + 36.6*(1+i/2)^(-26)
i = 9.5989%
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cost of stock
According to the dividend growth model
P0 = D1/(R-g) = D0*(1+g)/(R-g)
62.60 = 3.65*(1+.07)/(R-.07)
R = 13.2388%
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market value of the first bond = 71.6*.9 = 64.44
market value of the second bond = 36.6*.89 = 32.574
market value of debt = 64.44 + 32.574 = 97.014
cost of debt = 8.0983%*64.44/97.014 + 9.5989%*32.574/97.014 = 8.6022%
market value of equity = 7.6*62.6 = 475.76
WACC = 8.6022%*(1-.34)*97.014/(97.014+475.76) + 13.2388%*475.76/(97.014+475.76) = 11.96%
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