Zhou Bakery has 5.5 million shares of common stock outstanding selling for $20 p

Question

Zhou Bakery has 5.5 million shares of common stock outstanding selling for $20 per share on the market. Zhou has preferred stock outstanding with a market value of $14 million. The bakery maintains a beta of 1.2, and the risk free rate and market risk premium are 4% and 8.33%, respectively. The bakery also has 22,000 bonds selling for 90% of face value- the bonds mature in 15 years and have a coupon rate of 7.5%; interest is paid annually. Total preferred dividends are $1.4 million. Find the WACC for Zhou if the tax rate is 35%

Explanation / Answer

Market value of common stock in million=5.5*20 110 Cost of common stock=Risk free rate +Beta*Market Premium =4+1.2*8.33 13.996 Market value of preferred stock in million 14 Cost of preferred stock=Dividend/Stock Value=(1.4/14)*100 10 Market Value of bonds in million(assuming face value of bond to be 1000) =22000*1000*0.9 19.8 YTM=(C+(M-P)/n)/(0.4M+0.6P)=(75+(1000-900)/15)/(0.4*1000+0.6*900) 8.68 Total Capital=110+14+19.8 143.8 WACC=(110/143.8)*13.996+(14/143.8)*10+(19.8/143.8)*8.68*(1-0.35) 12.457 So WACC is 12.457%

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