You are given the following information concerning Parrothead Enterprises: Debt:
ID: 2718633 • Letter: Y
Question
You are given the following information concerning Parrothead Enterprises: Debt: 10,400 7.4 percent coupon bonds outstanding, with 21 years to maturity and a quoted price of 107.5. These bonds pay interest semiannually. common stock: 295,000 shares of common stock selling for $65.90 per share. The stock has a beta of .99 and will pay a dividend of $4.10 next year. The dividend is expected to grow by 5.4 percent per year indefinitely. preferred stock. 9,400 shares of 4.7 percent preferred stock selling at $95.40 per share. Market. A 10.6 percent expected return, a risk-free rate of 5.4 percent, and a 40 percent tax rate. Calculate the WACC for Parrothead Enterprises.Explanation / Answer
Cost of Equity = Expected Dividend in One year/Current Stock Price+Growth Rate
= 4.1/65.90+5.4
= 5.46%
YTM Bond(Approx) = C+(F-P/n)/(F+P/n)
= 3.7+(100-107.5/42)/(100-107.5/2)
= 3.7 +.048
= 3.75% Semi Annually = 7.5% Annually
Cost of Debt = 7.5%*(1-.40)
= 4.5%
Cost of Preferred Stock = Dp/ Pp
= 4.7/95.4
= 4.93%
Market Value of Equity(common Stock)= 295000*65.90 = 19440500
Current Market value of Debt =10400*107.5 = 1118000
Market Value of Preferred Stock = 9400*95.4 = 896760
TOAL MARKET VALUE OF DEBT AND EQUITY = 21455260
Weight of Equity = 19440500/21455260 = 90.61%
Weight of Debt = 1118000/21455260 = 5.21%
Weight of Preferred Stock= 896760/21455260 = 4.18%
WACC= 90.61%*5.46%+5.21%*4.5%+4.18%*4.93% = 5.39%
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