9,600 7.1 percent coupon bonds outstanding, with 24 years to maturity and a quot
ID: 2636034 • Letter: 9
Question
9,600 7.1 percent coupon bonds outstanding, with 24 years to maturity and a quoted price of 105.5. These bonds pay interest semiannually.
255,000 shares of common stock selling for $65.10 per share. The stock has a beta of .91 and will pay a dividend of $3.30 next year. The dividend is expected to grow by 5.1 percent per year indefinitely.
Calculate the WACC for Parrothead Enterprises. (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
You are given the following information concerning Parrothead Enterprises:Explanation / Answer
cost of equity dividend model = 3.3/65.10 + 0.051 =10.169%
cost of equity capmmodel = 5.1+0.91*(11.4-5.1) =10.83%
cost of equity = 10.83% + 10.169% /2 = 10.50%
cost of preferred stock = 4.55/94.60 = 4.81%
1055 = 35.5 * PVIFA(r%,48) + 1000 *PVIF(r%,48)
r = 3.32%
after tax cost of debt = 2* r * (1-0.34) = 4.3824$
market value of debt = 9600 * 1055 = 10128000
market value of equity = 255000 * 65.10 = 16600500
market value of preferred stock = 8600 * 94.60 = 813560
totalvalue = 27542060
WACC = (10128000/27542060) * 4.3824 + (16600500/27542060) * 10.50 + (813560/27542060) * 4.81
= 8.08%
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