Great Corporation has the following capital situation. Debt: One thousand bonds

Question

Great Corporation has the following capital situation. Debt: One thousand bonds were issued five years ago at a coupon rate of 8%. They had 25-year terms and $1,000 face values. They are now selling to yield 9%. The tax rate is 39% Preferred stock: Two thousand shares of preferred are outstanding, each of which pays an annual dividend of $7.50. They originally sold to yield 15% of their $50 face value. They're now selling to yield 8%. Equity: Great Corp has 133,000 shares of common stock outstanding, currently selling at $12.48 per share. Dividend expected for next year is $.80 and the growth rate is 6%.

Explanation / Answer

Value of bond today = 80/1.09 + 80/1.09^2 + 80/1.09^3 .............1080/1.09^20 = $908.71 Value of debt = 1000*908.71 =908,710 Value of preferred stocks = $7.50/8% =93.75 Value of total prefered stocks = 2000*93.75 =187500 rate of equity = r 12.48 = .8/(r-6%) r= 12.41% total equity = 133000*12.48 =1,659,840 weighted average cost of capital = 9%*908,710/(908,710+187500+1,659,840)*(1-39%) + 12.41%*1,659,840/(908,710+187500+1,659,840) + 8%*187500/(908,710+187500+1,659,840) =9.83%

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