Blue Moon has 50 million shares of common stock outstanding, 20250000 shares of

Question

Blue Moon has 50 million shares of common stock outstanding, 20250000 shares of 7%, $150 par value preferred stock outstanding and 1250000 9% semi annual bonds outstanding par value $1000 each. The stock currently seels for $50 paid a dividend of $5 last year - it is forecast to grow at 2% per year for the foreseeable future. The market is expected to return 11% and the risk free rate is 3%. THe stock has a B=1.5, the preferred sticj seeks fir $60 and the bonds mature in 20 yrs and sell for $1075. THe floatation cost for Common stock, preferred stock, and bonds are $5, $8 and $15. Tax rate is 25%

Find the market value weights for: Debt, Preferred Stock, Common Stock

Find the after tax costs of issuing new:

Debt, Prefered Stock, Common Stock

THe Wacc is?

Explanation / Answer

Answer:

Markt value weights

After tax costs:

With the use of Excel:

Debt (pretax) = 8.37%

After tax cost = 6.28%

Preferred stock = Annual dividend / Price

= 10.5 / (60-8)

= 20.19%

Common stock

Rate = Dividend / price - FC + g

= 5*(1.02) / (50-5) + 2%

= 13.33%

WACC = Cost of debt*weight of debt + Cost of equity*weight of equity + Cost of preferred*weight of preferred

WACC = 13.11%

Number Value Total value Weight Debt 1250000 1075 1343750000 26.56% Preferred 20250000 60 1215000000 24.02% Common 50000000 50 2500000000 49.42% Total 5058750000 100%

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