Trivoli Company uses preferred Shares, Common Shares, and Debt to finance its pr

Question

Trivoli Company uses preferred Shares, Common Shares, and Debt to finance its projects. Use the following information to calculate its WACC. It plans to issue perpetual preferred stock with an $11.00 dividend. The preferred stock is currently selling for $97.00; but flotation costs will be 5% of the market price. Its Capital Structure consists of 13.62% of preferred shares. The total value of preferred shares is $92,150. 4 years ago, Trivoli sold an issue of bonds with 10-year maturity, $1000 par value, 10% coupon rate, and semiannual interest payments. Currently, interest rates are 6.00143745%. It has 300 Bonds outstanding. Trivoli has 10,000 commons shares outstanding, with each worth $22.50 and the return on equity is 16%. Trivoli’staxrateis40%. (HINT: You need to calculate the price of the bonds. Years to maturity on the bonds is 6 years, also remember that it is paid semiannually. Then add the total value of debt, to the total value of stock and preferred shares, so you can find the weights of debt and Equity)

Explanation / Answer

Trivoli Company Details Amt $ Preference share price =97 Less floatation cost @5%=4.85 Net Proceeds from Preference share = $              92.15 Dividend per prference share =                        11 Cost of preference share =11/92.15= 11.94% Bond price calculation Bonnd Par value                    1,000 Annual interest@10%=                      100 Semi annula interest                          50 Current market interest rate   6.0014375% Current semi annual market interest rate = 3.0007187% Years to maturity=                          6 Current Bond price: Period Interest +Maturity Cash flow PV factor @3.0007187% PV of cash flows Period 1                        50                0.9709            48.543 Period 2                        50                0.9426            47.129 Period 3                        50                0.9151            45.756 Period 4                        50                0.8885            44.423 Period 5                        50                0.8626            43.129 Period 6                        50                0.8374            41.872 Period 7                        50                0.8131            40.653 Period 8                        50                0.7894            39.468 Period 9                        50                0.7664            38.318 Period 10                        50                0.7440            37.202 Period 11                        50                0.7224            36.118 Period 12                  1,050                0.7013          736.387 Total PV =         1,199.00 So current Bond price =$1199 No of bonds 300 So Bond Market Value =             359,700 YTM Formula= [Annual Interest+(Par Value-Market Value)/Years to Maturity]/(Par value+Market Price*2)/3   Cost of Bond =YTM={100+(1000-1199)/6]/(1000+2*1199)/3 YTM =5.96% Tax rate =40% So post tax cost of debt =5.96%*(1-40%)= 3.58% No of common shares                10,000 Price per share                    22.50 Market Value of shares =             225,000 Cost of equity =16% WACC calculation : Capital Type Market Value % wt Market Value Post Tax cost Wtd cost   Preference share                92,150 13.61% 11.94% 1.63% Debt             359,700 53.14% 3.58% 1.90% Equity             225,000 33.24% 16.00% 5.32% Total             676,850 8.84% So WACC is 8.84%

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