You are given the following information concerning Parrothead Enterprises: 10,90

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

Solution:

WACC Market Value Market value as weights Cost of Capital Weighted cost of capital Debt 11,853,750 34.81% 4.44% 1.55% Common stock 21,248,000 62.40% 10.34% 6.45% Preferred stock 949,410 2.79% 4.70% 0.13% Total 34,051,160 WACC 8.13%

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