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

Question

You are given the following information concerning Parrothead Enterprises: Debt: 9,800 7.3 percent coupon bonds outstanding, with 22 years to maturity and a quoted price of 106.00. These bonds pay interest semiannually. Common stock: 265,000 shares of common stock selling for $65.30 per share. The stock has a beta of 0.93 and will pay a dividend of $3.50 next year. The dividend is expected to grow by 5.3 percent per year indefinitely. Preferred stock: 8,800 shares of 4.65 percent preferred stock selling at $94.8 per share. Market: A 11.2 percent expected return, a 5.3 percent risk-free rate, and a 38 percent tax rate. Required: Calculate the WACC for Parrothead Enterprises.

Explanation / Answer

Debt:9,800x106.00=$1038800 Common stock:265,000x65.30= 17304500 Preferred stock:8,800x94.8 =$834240 Total= $19177540 106= 3.65PVIFA(Kd,44)+100PVIF(Kd,44) Kd= 2x3.39= 6.78% after tax Kd=6.78(1-.38)= 4.2036% Ke= 5.3+.93(11.2-5.3)= 10.787% Kpd= 4.65/94.8= 4.81% WACC= 1038800/19177540x4.2036+(17304500/19177540x10.787)+(834240/19177540x4.81)= 10.17%

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