10,800 7.3 percent coupon bonds outstanding, with 22 years to maturity and a quo
ID: 2754218 • Letter: 1
Question
10,800 7.3 percent coupon bonds outstanding, with 22 years to maturity and a quoted price of 108.5. These bonds pay interest semiannually.
315,000 shares of common stock selling for $66.30 per share. The stock has a beta of 1.04 and will pay a dividend of $4.50 next year. The dividend is expected to grow by 5.3 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).)
You are given the following information concerning Parrothead Enterprises:Explanation / Answer
WACC= kd* debt/ capital employed + kp * preference stock/ capital employed + ke * equity/ capital employed
=4.52*1171800/29925140 +4.65*938840/29925140 +10.4 * 27814500/29925140
=.177+.145+9.66
=9.98%
working notes :
kd = interest rate( 1- tax rate)= 7.3(1..38)=4.52%
kp= 4.65%
ke= by using capm, RF + Beta (Return market - risk free rate)
= 5.3+ 1.04(10.2 - 5.3) = 10.4%
current market value of dividend= dividend/ ke-g
= 4.5/10.396%- 5.3%
=$88.30
Total capital employed: Equity capital+ preferrence capital+ Debt
=$(315000* 88.30)+9800*95.8+ 10800*108.5
=$27814500+938840+1171800
=$29925140
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