Vedder, Inc., has 6.3 million shares of common stock outstanding. The current sh
ID: 2710976 • Letter: V
Question
Vedder, Inc., has 6.3 million shares of common stock outstanding. The current share price is $61.30, and the book value per share is $4.30. Vedder also has two bond issues outstanding. The first bond issue has a face value of $70.3 million, a coupon rate of 7.3 percent, and sells for 96.5 percent of par. The second issue has a face value of $35.3 million, a coupon rate of 6.8 percent, and sells for 95.5 percent of par. The first issue matures in 19 years, the second in 11 years. The most recent dividend was $3.00 and the dividend growth rate is 9 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 38 percent.
What is the company’s cost of equity? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
What is the company’s aftertax cost of debt? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
What is the company’s equity weight? (Do not round intermediate calculations. Enter your answer rounded to 4 decimal places (e.g., .1632).)
What is the company’s weight of debt? (Do not round intermediate calculations. Enter you answer rounded to 4 decimal places (e.g., .1632).)
What is the company’s WACC? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Vedder, Inc., has 6.3 million shares of common stock outstanding. The current share price is $61.30, and the book value per share is $4.30. Vedder also has two bond issues outstanding. The first bond issue has a face value of $70.3 million, a coupon rate of 7.3 percent, and sells for 96.5 percent of par. The second issue has a face value of $35.3 million, a coupon rate of 6.8 percent, and sells for 95.5 percent of par. The first issue matures in 19 years, the second in 11 years. The most recent dividend was $3.00 and the dividend growth rate is 9 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 38 percent.
Explanation / Answer
1)
Tax rate 38%
D1 $3
g 9.00%
P0 $61.3
Cost of equity re = D1/(P0) + g = 3 *(1 + 0.09)/61.3 + 0.09 = 14.33%
2)
K = N *2
BOND PRICE= [(Coupon/2)/(1 + YTM1/200)^k] + Par value/(1 + YTM1/200)^N*2
k=1
K = 19
96.5= [(7.3/2*100/100)/(1 + YTM1/200)^k] + 100/(1 + YTM1/200)^19*2
k=1
YTM1 = 7.65%
K = N *2
BOND PRICE= [(Coupon/2)/(1 + YTM2/200)^k] + Par value/(1 + YTM2/200)^N*2
k=1
K = 11*2
95.5= [(6.8/2*100/100)/(1 +YTM2/200)^k] + 100/(1 + YTM2/200)^11*2
k=1
YTM2 = 7.41%
A-T cost of debt = (1 - tax rate) *(YTM1 * weight of bond 1 + YTM2 * weight of bond 2)
= ( 1 - .38) *( 7.6524 * (70.3/(70.3 + 35.3)) + * 7.405(35.3/(70.3 + 35.3)))
=4.69%
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