Vedder, inc, has 6.6 million shares of common stock outstanding. The current sha
ID: 2752450 • Letter: V
Question
Vedder, inc, has 6.6 million shares of common stock outstanding. The current share price is $61.60, and the book value per share Is $4.60. Vedder also has two bond issues outstanding. The first bond issue has a face value of $70.6 million, a coupon rate of 7.1 percent, and sells for 95 percent of par. The second issue has a face value of $35.6 million, a coupon rate of 7.1 percent, and sells for 94 percent of par. The first issue matures in 21 years. The second in 13 years. The most recent dividend was $3.15 and the dividend growth rate is 7 percent. Assume that the overall cost o debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 34 percent..........Explanation / Answer
Answer:
Outstanding shares 6600000 Current price 61.6 Market value of shares 406560000 Bond 1 Facevalue 70600000 Coupon rate 7.10% Current price 67070000 Nper 21 Rate 7.58% Bond 2 Facevalue 35600000 Coupon rate 7.10% Current price 33464000 Nper 13 Rate 7.84% calculating the weight of debts Value Weight Cost WC Bond 1 67070000 0.6671 7.58% 5.06% Bond 2 33464000 0.3329 7.84% 2.61% 100534000 7.67% Precost of debt 7.67% After tax cost of debt = 7.67%*(1-.34) After tax cost of debt = 5.06% Calculating cost of equity D0 = 3.15 growth rate = 7% D1 = 3.37 Cost of equity = D1/P0 + g Cost of equity = (3.37/61.6) + 7% Cost of equity = 12.47% Calculating the capital structure Market value Weight Debt 100534000 19.83% Equity 406560000 80.17% 507094000 Calculating WACC Weight Cost Debt 19.83% 5.06% Equity 80.17% 12.47% WACC 11.00%Related Questions
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