You are given the following information concerning Parrothead Enterprises: 10,90
ID: 2752494 • Letter: Y
Question
You are given the following information concerning Parrothead Enterprises:
10,900 7.4 percent coupon bonds outstanding, with 21 years to maturity and a quoted price of 108.75. These bonds pay interest semiannually.
320,000 shares of common stock selling for $66.40 per share. The stock has a beta of 1.05 and will pay a dividend of $4.60 next year. The dividend is expected to grow by 5.4 percent per year indefinitely.
Calculate the WACC for Parrothead Enterprises. (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Debt:10,900 7.4 percent coupon bonds outstanding, with 21 years to maturity and a quoted price of 108.75. These bonds pay interest semiannually.
Common stock:320,000 shares of common stock selling for $66.40 per share. The stock has a beta of 1.05 and will pay a dividend of $4.60 next year. The dividend is expected to grow by 5.4 percent per year indefinitely.
Preferred stock: 9,900 shares of 4.7 percent preferred stock selling at $95.90 per share. Market: A 10.1 percent expected return, a risk-free rate of 5.4 percent, and a 40 percent tax rate.Explanation / Answer
(‘a) Cost of Debt – Cost of debt in case of bond is yield to maturity of bond.
It is calculated by solving the following equation
Market Value of Bond = Coupon Payment x [1-(1+r)-n]/r + Face Value / (1+r)n
‘r = Yield to Maturity / Number of Coupon payment per year
Face Value = $100, Market Value = 108.75
Coupon Payment = $3.70,
108.75 = 3.70 x [1- 1.037-42]/0.037 + 100/(1.037)42
YTM = 6.62 %
Pre Tax Cost of Debt = 6.62
Post Tax Cost of Debt = 6.62 x (1-0.4)
Post tax cost of debt = 3.97 %
(‘b) Cost of Common Stock
P0 = D1/(Ke-G)
66.40 = 4.60 / (Ke-G)
Ke = 12.33 %
(‘c ) Cost of Preferred Stock –
Cost = Preference Dividend/ Price
Cost = 4.7/95.90
Cost = 4.90 %
Source
Number
Current Price
Market Value
Weight
Cost
WACC
Common Stock
320,000
66.40
212,48,000
90.87
0.1233
11.20
Preferred Stock
9,900
95.90
949,410
4.06
0.0490
0.20
Bond
10,900
108.75
1185,375
5.07
0.0397
0.20
233,82,785
11.60
WACC = 11.60 %
Post tax cost of debt will be considered.
Source
Number
Current Price
Market Value
Weight
Cost
WACC
Common Stock
320,000
66.40
212,48,000
90.87
0.1233
11.20
Preferred Stock
9,900
95.90
949,410
4.06
0.0490
0.20
Bond
10,900
108.75
1185,375
5.07
0.0397
0.20
233,82,785
11.60
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