(a) Several years ago the Haverford Company sold a $1,000 par value bond that no
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Question
(a) Several years ago the Haverford Company sold a $1,000 par value bond that now has 25 years to maturity and an 8.00% annual coupon that is paid quarterly. The bond currently sells for $900.90, and the company’s tax rate is 40%. What is the component cost of debt for use in the WACC calculation? (Already solved this section, 5.41%)
(b) Haverford uses debt, common equity and preferred stock in their capital structure. Using the following information AND the cost of debt calculated in part (a) above, determine the WACC for the company:
Preferred Dividend is $2.50 per share
Price of Preferred is $22.72
Weight of Debt is 40% and Weight of Equity is 45%
Haverford estimates the cost of equity based on their debt yield plus a risk premium of 5.5%
Explanation / Answer
price of preffered= preference dividend/rate of return
rate of return=2.5/22.72
=11%
Cost of equity= 5.5%+cost of debt
=5.5%+5.41%=10.91%
wt of debt=40% wt of equity=45% wt of preferes stock=100%-(40%+45%)=15%
=(0.4*5.41%)+(0.45*10.91%)+(0.15*11%)=8.72%
cost of equity=(wt odf debt* cost of debt)+(wt of equity*cost of equity)+(wt of prefered stock* cost of prefered stock)
=
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