What is the WACC for the company based on the following information: The company

ID: 2737264 • Letter: W

Question

What is the WACC for the company based on the following information:

The company’s capital structure is 30% common equity, 10% preferred equity and 60% debt.

The price on the company’s 11-year bonds is 888.16.

The bonds pay coupons of 35.50 every six months.

The company’s year-end dividend on common stock is forecasted to be $1.25 a share.

The company expects that its dividend will grow at a constant rate of 6.5 percent a year.

The company’s stock price is $29. The company’s preferred stock is priced at $20 and has a dividend of $2.20 per share.

The company’s tax rate is 30 percent.

Answer:

Common equity (Ke)=D1/P0+g

=$1.25/$29+0.065

=10.81%

Cost of Preferred shares=Dividend/Net Proceeds

=$2.20/$20

=11%

Cost of Debt:

888.16=$35.50*PVIFA(r%,22)+$1000*PVIF(r%,22)

r=4.35% semiannually

R=8.70% annually

cost of debt after tax=8.70%(1-0.30)=6.09%

WACC:

Capital structure Weight Cost of capital WACC Common equity 30% 10.81% 3.24% Preferred shares 10% 11% 1.10% Debt 60% 6.09% 3.65% Total 8.00%

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