The Intel Corporation must raise $1 million to finance the remodeling of its cor
ID: 2731854 • Letter: T
Question
The Intel Corporation must raise $1 million to finance the remodeling of its corporate headquarters. It plans to do this by increasing the number of shares of preferred and common stock and by issuing 15-year corporate bonds with a face value of $1000 and annual payments at a coupon rate of 8.5 percent.
The corporation’s long-term debt currently amounts to 20,000 corporate bonds with a current market value of $875/bond. The corporation has 50,000 shares of preferred stock outstanding with a market value of $130/share. The corporation also has 1,500,000 outstanding shares of common stock with a current market value of $55/share.
Holders of preferred stock currently receive annual dividends of $5/share, and holders of common stock currently receive annual dividends of $4.00/share. The annual growth rate of common stock is 3 percent.
Flotation costs are 1 percent for bonds, 2 percent for preferred stock, and 4.5 percent for common stock.
Intel’s tax rate is 34 percent.
1) What are weights for Intel’s debt, preferred stock and equity based on the market value?
2) What is Intel’s after tax cost of debt?
3) What is Intel’s cost of Preferred stock?
4) What is Intel’s cost of equity?
5) What is the Intel’s weighted average cost of capital (WACC)?
Explanation / Answer
1.
Market value of equity = 1,500,000 shares * $55 = $82,500,000
Market value of preferred stock = 50,000 shares * $130 = $6,500,000
Market value of debt = 20,000 bonds *$875 = $17,500,000
Total value of Intel Corporation = $82,500,000 + $6,500,000 + $17,500,000 = $106,500,000
Weight of equity = $82,500,000/$106,500,000 = 0.7746
Weight of preferred stock = $6,500,000/$106,500,000 = 0.0611
Weight of debt = $17,500,000/$106,500,000 = 0.1643
2.
Current price of bond = $875
Current price (net of floatation cost) = $875*(1-0.01) = $866.25
Current price of bond = Present value of coupon payments + Present value of face value
$866.25 = $85*{1-(1+r)-15}/r + $1,000/(1+r)-15
r = 10.29%
Tax rate = 34%
After tax cost of debt = 10.29% * (1 – 0.34) = 6.79%
3.
Cost of preferred stock = Annual dividend / Market price net of floatation cost
Market price net of floatation cost = $130*(1-0.02) = $127.40
Cost of preferred stock = $5/$127.40 = 0.0392 = 3.92%
4.
Cost of equity = {Dividend*(1+growth rate)/Price net of floatation cost} + Growth rate
Price net of floatation cost = $55*(1-0.045) = $52.525
Cost of equity = ($4*1.03)/$52.525 + 0.03 = 0.0784 + 0.03 = 0.1084 = 10.84%
5.
Weighted average cost of capital = (10.84%*0.7746) + (3.92%*0.0611) + (6.79%*0.1643) = 9.75%
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.