Please show all your work & stepsto support your answers. Thank you! The Good Li

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Please show all your work &

stepsto support your

answers. Thank you!

The Good Life Co. has the following securities outstanding: *Firm has outstanding an issue of 11%, semi-annual coupon bonds, par value $1000 with 5 years remaining to maturity. The bonds currently sell at 110% of par. There are 10,000 bonds outstanding. *The firms common stock currently is selling at $50 per share. Value Line reports the firm's beta as 1.5. The t-bill rate is 6% and the return on the S&P; 500 is 11%. The firms last dividend (Do) was $2.00 per share & the dividends are expected to grow at a rate of 10% annually indefinitely. There are 2,000,000 common shares outstanding. *Firm has no preferred stock in its capital structure *The firms tax rate is 40% Questions to be answered: Calculate the costs of the components to be used in the WACC. (LT Debt & Common Equity..Take Average of 2 methods for common equity) Calculate the firms market value capital structure Calculate the firms WACC

Explanation / Answer

A. Cost of debt = rd coupon payment = 11%*1000/2 = 55 1100 = 55/(1+rd/2) + 55/(1+rd/2)^2 + 55/(1+rd/2)^3.......1055/(1+rd/2)^10 rd= 8.5% Cost of debt = 8.5% Cost of equity = re Using dividend growth model 50 = 2*1.1/(re-10%) re= 14.4% Using CAPM re = 6% + 1.5*(11%-6%) = 13.5% cost of equity =( 13.5%+ 14.4%)/2 = 13.95% B.Market value of equity =2000000*50 =$100,000,000 Market value of debt = 1100*10000 =$11,000,000 C. WACC =(11,000,000*8.5%*(1-40%) + 100,000,000*13.95%)/(100,000,000+ 11,000,000) = 13.07%

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