Omicron Corporation have $10MM In 6.5% bonds Payable, which sell for $1,111, hav

Question

Omicron Corporation have $10MM In 6.5% bonds Payable, which sell for $1,111, have semiannual payaments and mature in twenty years. their tax rate is 40%, and rate of government bonds is 4%. They have 1.5 Milllion shares of Common Stock with a beta of 1.584 and which paid $1.30 is Dividends last year and the Stock Currently sells for $21.95. They also have 10,000 shares of 9% Preferred Stock with a $75 par value which sells for $80. The Stock market on Average is Expected to Give 9% return in the Future.

Required: Compute the weighted average cost of capital. You MUST your work for credit.

Explanation / Answer

Answer: Calculation of WACC:

Cost of Debt:

1111=(1000*6.5%*1/2)*PVIFA(r%,40)+$1000*PVIF(r%,40)

r=2.79% semiannually

r=2.79%*2=5.58%

Kd after tax=5.58%(1-0.40)=3.348%

Rf (Risk free rate)=4%

Beta=1.584

ERm (Expected return on market)=9%

Ke (cost of equity)=Rf+beta(ERm-Rf)

=4%+1.584(9%-4%)

=11.92%

Kp (cost of Preference shares)=Dividend/Net Proceeds

=75*9%/80

=8.4375%

WACC=9.73%

Capital structure Market value Weight Cost of capital WACC Debt 11110000 0.2478 3.35% 0.83% Preference shares 800000 0.0178 8.44% 0.15% Equity share 32925000 0.7344 11.92% 8.75% Total 44835000 1.0000 9.73%

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.