The Saunders Investment Bank has the following financing outstanding. Debt: 130,
ID: 2746062 • Letter: T
Question
The Saunders Investment Bank has the following financing outstanding.
Debt: 130,000 bonds with a coupon rate of 9 percent and a current price quote of 112.0; the bonds have 20 years to maturity. 300,000 zero coupon bonds with a price quote of 17.0 and 30 years until maturity.
Preferred stock: 220,000 shares of 7 percent preferred stock with a current price of $69, and a par value of $100.
Common stock: 3,300,000 shares of common stock; the current price is $55, and the beta of the stock is 1.00.
Market: The corporate tax rate is 35 percent, the market risk premium is 6 percent, and the risk-free rate is 3 percent.
What is the WACC for the company?
Explanation / Answer
Risk Free Rate, Rf = 3%
Market Risk Premium, Rm - Rf = 6%
Beta = 1
Cost of Equity = Rf + (Rm - Rf) beta
= 3 + (6 * 1)
= 9%
Cost of debt = 9 (1-0.35) = 9 * 0.65 = 5.85%
Cost of preferred Stock = 7%
Market Value of Equity = 3300000 * 55 = $18,15,00,000
Market Value of debt = 130000 * 112 = $1,45,60,000
Market Value of preferred Stock = 220000 * 69 = $1,51,80,000
Market Value of Zero Coupon Bonds = 300000 * 17 = $51,00,000
Calculation of WACC:
$1,51,80,000
WACC = 8.44%
Category Cost of Capital Value Weighted Cost Equity 9% $18,15,00,000 7.5506 Preferred Stock 7%$1,51,80,000
0.49117 Debt 5.85% $1,45,60,000 0.3937 ZCB $51,00,000 $216340000 8.43547Related Questions
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