Vedder, Inc., has 7.5 million shares of common stock outstanding. The current sh

ID: 2755906 • Letter: V

Question

Vedder, Inc., has 7.5 million shares of common stock outstanding. The current share price is $62.50, and the book value per share is $5.50. Vedder also has two bond issues outstanding. The first bond issue has a face value of $71.5 million, a coupon rate of 7 percent, and sells for 90.5 percent of par. The second issue has a face value of $36.5 million, a coupon rate of 8 percent, and sells for 89.5 percent of par. The first issue matures in 20 years, the second in 12 years. The most recent dividend was $3.60 and the dividend growth rate is 6 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 35 percent.

What is the company’s WACC? (

Explanation / Answer

Answer: Ke=[D1/P0]+g

=[3.60*1.06/$62.50]+0.06=12.11%

Market value of equity: price*No. of shares = 62.50 * 7.5m = 468750000

Kd=

Market value of 1st bond: 71.5 m * 90.5% = 64707500
Market value of 2nd bond: 36.5m *89.5%= 32667500
Total value of debt: $97375000

First bond

90.5=3.5*PVIFA(Y,40)+$100*PVIF(Y,40)

Y=3.98%

Y=3.98*2=7.96%

Second Bond:

89.5=4*PVIFA(Y,24)+$100*PVIF(Y,24)

Y=4.74%

Y=4.74*2=9.48%

Kd=8.47%

Kd=8.47%(1-0.35)=5.51%

Particulars Market value Weight Cost of capital WACC First bond 64707500 0.6645 7.96% 5.29% Second bond 32667500 0.3355 9.48% 3.18% Total 97375000 1 8.47%

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Vedder, Inc., has 7.4 million shares of common stock outstanding. The current sh

Vedder, Inc., has 7.5 million shares of common stock outstanding. The current sh

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Vedder, Inc., has 7.5 million shares of common stock outstanding. The current sh

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