You are given the following information concerning Parrothead Enterprises: 9,100

Question

You are given the following information concerning Parrothead Enterprises:

9,100 6.3 percent coupon bonds outstanding, with 24 years to maturity and a quoted price of 104.25. These bonds pay interest semiannually.

230,000 shares of common stock selling for $64.60 per share. The stock has a beta of .86 and will pay a dividend of $2.80 next year. The dividend is expected to grow by 5.1 percent per year indefinitely.

Calculate the WACC for Parrothead Enterprises. (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Debt:

9,100 6.3 percent coupon bonds outstanding, with 24 years to maturity and a quoted price of 104.25. These bonds pay interest semiannually.

Common stock:

230,000 shares of common stock selling for $64.60 per share. The stock has a beta of .86 and will pay a dividend of $2.80 next year. The dividend is expected to grow by 5.1 percent per year indefinitely.

Preferred stock: 8,100 shares of 4.55 percent preferred stock selling at $94.10 per share. Market: A 11.9 percent expected return, a risk-free rate of 5.1 percent, and a 34 percent tax rate.

Explanation / Answer

weights cost debt 9100 104.25 948675 0.057256 1.32 0.075578 equity 230000 64.6 14858000 0.896741 10.948 9.817521 preference 8100 94.1 762210 0.046002 4.8352816 0.222435 16568885 OVERALL COST OF CAPITAL 10.11553 PERCENT cost of preference (preference dividend/market price)*100 4.835281615 cost of debt interest + (RV- MP)/ life / (RV-MP)/2 2.05 102.125 0.013248 1.32 AFTER TAX COST OF DEBT COST OF EQUITY IRF +(Rm-IRF)*BETA 10.948

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