Suppose the stock price is $25, there are 1.5 million shares of stock, the firm

Question

Suppose the stock price is $25, there are 1.5 million shares of stock, the firm has $ 13.5 million of preferred stock, and $62 million of debt. Estimate the total value the WACC weights. write the WACC formula with the corresponding weights estimate the cost of debt. Assume that you are issuing a 10 yr, 6% semiannual bond that sells for $1,015.72 (use the excel formula) illustrate the before-tax cost of debt by showing the corresponding time line. if the tax rate is 40%, what is the after-tax cost of debt? what role do flotation costs play in the cost of debt? explain estimate the annual and quarterly cost of issuing preferred stock (use the cost of preferred stock formula studied is class). assume the price of preferred stock is $104,35, 4% dividend, $100 par(face) value and flotation costs (f) of 5% Draw the time line of preferred stock. Remember that dividends are paid quarterly. Make sure your result is correct by estimating the cost of issuing preferred stock using the corresponding excel formula. Use the camp cost of equity model to determine the cost common stock. assume that the risk free is 3.2%, the market risk premium is 4% and the estimate of beta is 0.98. rewrite wacky formula, substituting the values you have found in all the previous questions. what is the hurdle rate? what does it mean? explain. define an agency relationship. if you are the only employee, and only your money is invested in the business, would any agency problems exits? explain. would hiring additional people create agency problems? explain. define the concept of corporate governance.

Explanation / Answer

As multiple questions are posted, only first one will be answered.

1. Market Value of Debt = $ 62 million

Market Value of preferred stock = $ 13.5 million

Market value of common stock = $25 * 1.5 million = $ 37.5 million

a. Total Value = Market Value of Debt + Market Value of preferred stock + Market value of common stock

= 62 + 13.5 + 37.5 = $ 103 million

b. WACC weigths for:

Debt = Market Value of Debt / Total value = 62/103 = 0.6019

Preferred Stock = Market Value of preferred stock / Total Value = 13.5 / 103 = 27 / 206 = 0.1311

Common Stock = Market value of common stock / Total Value = 37.5/103 = 75/206 = 0.3641

i. WACC formula: 0.6019* (Cd) + 0.1311*(Cp) + 0.3641*(Cs)

where Cd : Cost of Debt

Cp : Cost of preferred stock

Cs : Cost of common stock

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