value: 1.00 points You are given the following information concerning Parrothead
ID: 2646801 • Letter: V
Question
value: 1.00 points 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. A 11.5 percent expected return, a risk-free rate of 5 percent, and a 35 percent tax rate Market: 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).) 9.88 WACCExplanation / Answer
Cost of debt = Interest rate x (1 - tax rate) = 7.12% x (1 - 0.35) = 4.63%
Where annual interest rate = (1 + (0.07 / 2)2 - 1 = 7.12%
Cost of preferred stock = Preference dividend / price per share = 4.5 / 94.5 = 4.76%
Cost of equity = (Next year dividend / current market price) + growth rate = (3.2 / 65) + 0.05 = 9.92%
Value of debt = 9,500 x 100 = 950000
Value of preferred stock = 8500 x 100 = 850000
Value of equity = 250,000 x 100 = 25000000
Total value of capital employed = 26,800,000
% of debt = 3.54%
% of preferred stock = 3.17%
Value of equity = 93.29%
So WACC = 3.54% x 4.63% + 3.17% x 4.76% + 93.29% x 9.92% = 0.1639 + 0.1509 + 9.2544 = 9.57%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.