You are given the following information concerning Parrothead Enterprises: Debt:

Question

You are given the following information concerning Parrothead Enterprises: Debt: 9,500 7 percent coupon bonds outstanding, with 25 years to maturity and a quoted price of 105.25. These bonds pay interest semiannually. Common stock: 250,000 shares of common stock selling for $65.00 per share. The stock has a beta of .90 and will pay a dividend of $3.20 next year. The dividend is expected to grow by 5 percent per year indefinitely. Preferred stock: 8,500 shares of 4.5 percent preferred stock selling at $94.50 per share. Market: A11.5 percent expected return, a risk-free rate of 5 percent, and a 35 percent tax rate. Required: 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).) WACC %

Explanation / Answer

Hi,

Please find the correct answer as follows;

Cost of debt:

105.25 = 7*(1-(1+r/2)^(-50))/(r/2)+100/(1+r/2)^50

=> r = 13.27%

Cost of equity:

65 = 3.20/(Ke-5%)

=> Ke = 3.20/65+5%

=9.92%

Cost of preffered stock:

Cost pf preffered stock = 4.5/94.50

=4.76%

Total Debt = 9500*105.25

=$999875

Total Equity = 250000*65

=$16250000

Total preffered stock = 8500*94.50

=$803250

WACC = (16250000/18053125)*9.92%+(803250/18053125)*4.76%+(999875/18053125)*13.27%

=9.88%

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