1) The capital structure weights used in computing the weighted average cost of
ID: 2707961 • Letter: 1
Question
1) The capital structure weights used in computing the weighted average cost of capital are based on what values of the firm (i.e. book, adjusted book, market, etc):
Debt
50,000 bonds with 6.5 coupon rate, payable annually, $1,000 par value, 20 years to maturity, selling at 96.3.
Common Stock
1,000,000 shares of common stock outstanding. The stock sells for a price of $40 per share and has a beta of 1.5
Preferred Stock
150,000 preferred shares outstanding, currently trading at $120 per share; with an annual dividend payment of $9.00
Market
The market risk premium is 9% and the risk free rate is 3%
Tax Rate
30%
What is the before tax cost of debt?
What is the after tax cost of debt?
What is the company
Debt
50,000 bonds with 6.5 coupon rate, payable annually, $1,000 par value, 20 years to maturity, selling at 96.3.
Common Stock
1,000,000 shares of common stock outstanding. The stock sells for a price of $40 per share and has a beta of 1.5
Preferred Stock
150,000 preferred shares outstanding, currently trading at $120 per share; with an annual dividend payment of $9.00
Market
The market risk premium is 9% and the risk free rate is 3%
Tax Rate
30%
The capital structure weights used in computing the weighted average cost of capital are based on what values of the firm (i.e. book, adjusted book, market, etc): Debt 50,000 bonds with 6.5 coupon rate, payable annually, $1,000 par value, 20 years to maturity, selling at 96.3. Common Stock 1,000,000 shares of common stock outstanding. The stock sells for a price of $40 per share and has a beta of 1.5 Preferred Stock 150,000 preferred shares outstanding, currently trading at $120 per share; with an annual dividend payment of $9.00 Market The market risk premium is 9% and the risk free rate is 3% Tax Rate 30% What is the before tax cost of debt? What is the after tax cost of debt? What is the companys cost of preferred stock? What is the companys cost of common stock?Explanation / Answer
963 = 65 * PVIFA(r%,20) + 1000 * PVIF(r%,20)
usig YTM calculator
before tax cost of debt = ytm = 6.85%
after tax cost of debt = 6.85% *(1-0.3) = 4.795% = 4.8%
market value of debt = 50000 * 963 = 48150000
cost of common stock = 3% + 1.5 * 9% = 16.5%
market value of common stock = 1000000 * 40 = 40000000
cost of preferred stock = 9/120 = 7.5%
market valye of preferred stock = 150000 * 120 = 18000000
total market value = 48150000 + 40000000 + 18000000 = 106150000
WACC = (48150000/106150000) * 4.795% + ( 40000000/106150000) * 16.5% + ( 18000000/106150000) * 7.5%
= 9.66%
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