Tracy Morgan Productions has 80,000 bonds outstanding that are selling at par. B
ID: 2753893 • Letter: T
Question
Tracy Morgan Productions has 80,000 bonds outstanding that are selling at par. Bonds with similar characteristics are yielding 6.75 percent. The company also has 750,000 shares of 7 percent preferred stock and 2.5 million shares of common stock outstanding. The preferred stock sells for $53 a share. The common stock has a beta of 1.34 and sells for $42 a share. The U.S. Treasury bill is yielding 2.8 percent and the return on the market is 11.2 percent. The corporate tax rate is 41.4 percent. What is the firm's weighted average cost of capital?
Explanation / Answer
Market value of bond = 80000 *1000 = $ 80,000,000
Market value of preferred stock = 53*750000 = $ 39,750,000
Market value of common stock = 2500000*42 = $ 105,000,000
Total market value = 224750000
cost weights weight *cost After tax cost of bond [6.75 (1 -.414) ] 3.9555 80,000,000 / 224750000 = .36 1.424 Preferred stock [7/53] 13.21 39750000/224750000 = .18 2.378 common stock [2.8+ [1.34(11.2-2.8)]=[2.8 +(1.34*8.4)] 14.056 105000000/224750000 = .46 6.466 WACC 10.27%Related Questions
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