Vedder, Inc., has 7.7 million shares of common stock outstanding. The current sh
ID: 2762208 • Letter: V
Question
Vedder, Inc., has 7.7 million shares of common stock outstanding. The current share price is $62.70, and the book value per share is $5.70. Vedder also has two bond issues outstanding. The first bond issue has a face value of $71.7 million, a coupon rate of 7.2 percent, and sells for 89.5 percent of par. The second issue has a face value of $36.7 million, a coupon rate of 8.2 percent, and sells for 88.5 percent of par. The first issue matures in 22 years, the second in 14 years. The most recent dividend was $3.70 and the dividend growth rate is 8 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 30 percent.
Required:
What is the company’s cost of equity? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
What is the company’s aftertax cost of debt? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
What is the company’s equity weight? (Do not round intermediate calculations. Enter your answer rounded to 4 decimal places (e.g., .1632).)
What is the company’s weight of debt? (Do not round intermediate calculations. Enter you answer rounded to 4 decimal places (e.g., .1632).)
What is the company’s WACC? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Explanation / Answer
no of shares 7700000 62.7 482790000 expected dividend 3.7 8% 3.996 share price 62.7 cost of equity 6.373205742 cost of debt first bond 71700000 Market value of bond 64171500 coupon payment 5162400 cost of debt interest +[ Redemption value- market value/n / redemption value + market value / 2]*(1-T) 5504604.545 67935750 0.081026625 after tax rate 0.7 cost of first bond 0.056718638 5.671863756 percent cost of debt Second bond 36700000 Market value of bond 32479500 coupon payment 3009400 cost of debt interest +[ Redemption value- market value/n / redemption value + market value / 2]*(1-T) 3201240.909 34589750 0.09254883 after tax rate 0.7 after tax cost of debt 2nd bond 0.064784181 6.478418134 percent company's after tax cost of debt weight rate first bond 71700000 0.661439114 5.671863756 3.75159254 2nd bond 36700000 0.338560886 6.478418134 2.193338981 total debt 108400000 cost of debt for the firm 5.944931521 Weight company's equity weight 482790000 0.816641012 6.373205742 5.204621188 company's debt weight 108400000 0.183358988 5.944931521 1.090056626 total capital 591190000 overall cost of capital 6.294677814 percent
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