The following information is given about your company. The company needs raise n
ID: 2700704 • Letter: T
Question
The following information is given about your company. The company needs raise new capital to expand its facilities. The company%u2019s optimum capital structure has been 45% debt, 10% preferred stock and 45% equity. The company will maintain this capital structure in financing this expansion plan. Currently the company's common stock is traded at a price of $20 per share. The last annual dividend paid on the common stock was $1.50 per share. The constant growth rate is 8%. The company's preferred stock is selling at $50 and has a quarterly preferred dividend of $1.5. Flotation costs have been estimated at 8% on the common stocks and 3% on the preferred stocks. The company has some bonds with $1000 par value outstanding, the market price of the bonds is $975, and the bonds have 9 years to maturity. The coupon rate on those bonds is 8% with semi-annual payments. The tax rate is 46%.
What is the WACC of this company?
Explanation / Answer
a)
Kd
=
9%(1 - .46)
=
4.86%
Kp
=
Dp/(Pp-F)
=
$3/ ($50-$1.50)
=
6.19%
Ke
=
(D1/P0)+g
where D1 = D0 x (1 + g)
=
($1.62/$20)+0.08 = 16.1%
Kn
=
(D1/(P0-F))+g
=
($1.62/($20-$1.60))+0.08
=
16.8%
WACC
Cost
Weight
Kd
=
4.86%
x
.45
=
2.187%
Kp
=
6.19%
x
.10
=
0.619%
Ke
=
16.10%
x
.45
1.00
=
7.245%
10.051%
a)
Kd
=
9%(1 - .46)
=
4.86%
Kp
=
Dp/(Pp-F)
=
$3/ ($50-$1.50)
=
6.19%
Ke
=
(D1/P0)+g
where D1 = D0 x (1 + g)
=
($1.62/$20)+0.08 = 16.1%
Kn
=
(D1/(P0-F))+g
=
($1.62/($20-$1.60))+0.08
=
16.8%
WACC
Cost
Weight
Kd
=
4.86%
x
.45
=
2.187%
Kp
=
6.19%
x
.10
=
0.619%
Ke
=
16.10%
x
.45
1.00
=
7.245%
10.051%
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