As cfo what could you do and explain to increase NPV for this problem? Part II -

ID: 2745288 • Letter: A

Question

As cfo what could you do and explain to increase NPV for this problem? Part II - PROBLEMS (40 pts. total) 1. Given the following information, calculate the WACC: (12 pts) Common Stock: constant growth dividend of 5% Do is $4.00 Current stock price is $60.00 with 2 million shares Dividend is $7.0 Preferred stock price is $100.00 with 400,000 Preferred Stock shares Tax rate Debt 35% 7 percent coupon bonds with a 6.75% YTM Bond currently sells at 95 with 100,000 bonds a) calculate the WACC: show work

Explanation / Answer

Common Stock.

Cost of equity (Ke) = Do x(1+g)/P + g

= 4 x (1+0.05)/ 60 + 0.05

= 12%

Amount = 2,000,000 x 60

= 120,000,000

Preferred Stock

Cost of preferred stock (Kp) =dividend / price

= 7/100

= 7%

Amount = 100 x400, 000

= 40,000,000

Debt

Cost of debt (Kd) = YTM x (1-t)

= 6.75% x (1-0.35)

= 4.3875%

Amount = 1000 x95% x 100,000

= 95,000,000

Source

Amount

Cost

Amount x Cost

Common stock

120000000

12%

14400000

Preferred Stock

40000000

2800000

Debt

95000000

4.39%

4168125

255000000

21368125

WACC = sum of amount x cost / sum of amount

= 21368125/ 255000000

=8.38%