Company BW has issued $10,000 debt with an interest rate ol 10% Corporate income

Question

Company BW has issued $10,000 debt with an interest rate ol 10% Corporate income tax rate is 34%. find the after-tax cost of debt Company BW also has issued $10.000 preferred stock The face value is $100. coupon rate is 8%. and market pays $80 for a share Find the cost of preferred stock Company BW has 5000 shares outstanding and the price is $40 per share People believe this company a twice as risky as the stock market Current T-bill rate is 3% and expected stock market return this year is 9% What is BWs cost of equity? Find the overall cost of capital for BW (WACC) Company BW has the following two investment opportunities (A and B). Which protect n better, according to NPV?

Explanation / Answer

1 Calculation of after cost of debt Cost of debt = Interest rate - Tax rate 10-34% 6.6% 2 Calculation of cost of preferred stock Cost of preferred stock = Annual dividend on preferred stock / Current market price of preferred stock Face value = 100 Coupon rate = 8% Current market price = 80 Dividend $8.00 Cost of preferred stock = (8/80*100) 10% 3 Cost of equity T-Bill rate (risk free rate) 3% Market return 9% Since the company stock is twice risky as of marker the beta will be   2 Cost of equity Risk free rate+Beta*(Market return-risk free rate) 3% + 2 * ( 9 -3 ) 3 + 12 15% 4 Weighted cost of capital Kd Total debt $10,000.00 PS Total market value of preferred stock (10000/100*80) $8,000.00 ES Total market value of shares (5000*40) $2,00,000.00 V Total value of the company $2,18,000.00 Ke Cost of equity 15% Kps cost of preferred stock 10% Kd cost of debt 6.60% WACC = ES / V * Ke + PS / v * Kps + D / v * (kd-t) 200000/218000*15 + 8000/218000*10 + 10000/218000*6.60   14.43% 5 Calculation of net present value of project A and B End of year Net cash flows Amounts in dollars Project A Present value factors at 14.431% Present value cash flows Project B Present value factors at 14.431% 0 -8000 1.000 -8000.000 -6000 1.000 -6000.000 1 500 0.874 436.945 2500 0.874 2184.723 2 11500 0.764 8782.344 3500 0.764 2672.887 3 0.667 0.000 3500 0.667 2335.807 4 0.583 0.000 3000 0.583 1749.631 Net present value 1219.289 2943.048 Decision Project B is better since the net present value is higher.

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