8,000 6.5 percent coupon bonds outstanding, $1,000 par value, 20 years to maturi
ID: 2662533 • Letter: 8
Question
8,000 6.5 percent coupon bonds outstanding, $1,000 par value, 20 years to maturity, selling for 92 percent of par; the bonds make semiannual payments.
250,000 shares outstanding, selling for $57 per share; the beta is 1.05.
15,000 shares of 5 percent preferred stock outstanding, currently selling for $93 per share.
Debt: 8,000 6.5 percent coupon bonds outstanding, $1,000 par value, 20 years to maturity, selling for 92 percent of par; the bonds make semiannual payments.
250,000 shares outstanding, selling for $57 per share; the beta is 1.05.
Preferred stock:15,000 shares of 5 percent preferred stock outstanding, currently selling for $93 per share.
Explanation / Answer
WACC = Wd*kd*(1-T) + Wp*kp + Wc*ks ks = kRF + (kM - kRF)*bp ks = 4.5% + (8%-4.5%)*1.05 = 8.18%Kd = 6.5% Debt = 8000*1000 = 8M
ks = 8.18% as above Comon equity = 250000*10 = 2.5M (Assuming FV of $10 as beta ispositive & > 1)
kp = 5% Pref stock = 15000*100 =1.5M (As 6.5% bonds are selling at 92%to par, we are assuminmg that 5% Pref share are selling 93% ofpar) So Total Capital = debt + Common eq + Pref Sh = 8M + 2.5M +1.5M = 12M So Wd = 8/12 = 0.67, Wc = 2.5/12 = 0.21 & Wp =1.5/12 = 0.13
Putting values, we get WACC = Wd*kd*(1-T) + Wp*kp + Wc*ks WACC = 0.67*6.5%*(1-35%) + 0.13*5% + 0.21*8.18% ie WACC = 5.20%
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.