Fast Cash Limited has the following information and a tax rate of 30 percent. .
ID: 2757387 • Letter: F
Question
Fast Cash Limited has the following information and a tax rate of 30 percent. . Debt 700, 8 percent coupon bonds outstanding, $1,000 par value, 10 years to maturity, selling for 95 percent of par, the bonds make semi-annual payments Common stock 350,000 shares outstanding, selling for $60 per share; the beta is 1.05 Preferred stock 8,000 shares of 6 percent preferred stock outstanding, currently selling for $115 per share Market 7 percent market risk premium and 4 percent risk-free rate Determine the company’s WACC by computing the follow:
1. Total Market value for the company.
2. After-tax Cost of Debt
3. Cost of Common Stock
4. Cost of Preferred Stock
5. WACC
Explanation / Answer
1)
D = 700($1,000)(0.95) = $665,000
P= 8,000($115) = $920,000
E = 350,000 ($60) = $21,000,000
Total market value of the firm
V= $665,000+ $920,000+ $21,000,000 = 22,585,000
2)
The cost of debt is the YTM of the bonds, so
P= $950 = $40 / ( 1+YTM/2) + $40 / (1+YTM/2)2 + .....$40/(1+YTM)20
From the above YTM = 4.38% * 2 =8.76%
And the aftertax cost of debt is Rd= 8.76*(1-0.30) = 6.132%
3)
Cost of equity using the CAPM. The cost of equity is
Re = 0.04 + 1.05(0.07) = 0.1135 or 11.35%
4)
Rps = Dps/Pnet = $6 / $115 = 0.0521 or 5.21%
5)
RWACC = 0.06132(665,000 / 22,585,000) + 0.1135(21,000,000 / 22,585,000) + 0.0521(920,000 / 22,585,000)
RWACC = 0.00180+0.1055+0.0021 = 0.1094 or 10.94%
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