Johnston Corp has 10,000 bonds outstanding that were issued for 30 years ten yea

Question

Johnston Corp has 10,000 bonds outstanding that were issued for 30 years ten years ago at a par value of $1,000 and a coupon rate of 12%. Similar bonds are now selling to yield 9%. It issued 40,000 shares of 6% preferred stock at a $100 par value eight years ago. Those preferred shares are now selling to yield 10%, and are subject to an 8% flotation cost. There are currently 2,500,000 of common stock outstanding selling for $11.60 a share. Johnston's cost of equity is 14% Develop Johnston's market value based capital structure, and calculate its WACC. Assume equity capital comes from retained earnings, and the marginal tax rate is 40%.
Answer

Explanation / Answer

Current value of bond = 120/1.09 +120/1.09^2....1120/1.09^20 =$1,273.86 Total Debt =$1,273.86 *10,000= 12,738,600 Cost-of-preferred-stock (rp) = Preferred stock dividend/(Funds received – Flotation costs) 10% =6/(Price-8) Price = 60+8= $68 Total Value of preferred-stock = 40,000 *$68=$2,720,000 Total equity =2,500,000*$11.60= 29,000,000 Total value = 29,000,000 +$2,720,000+12,738,600 = 44,458,600 WACC = 12,738,600/44,458,600*9%*(1-40%) +$2,720,000/44,458,600*10% +29,000,000/44,458,600*14% =11.29%

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