Vedder, Inc., has 7.7 million shares of common stock outstanding. The current sh
ID: 2762353 • 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 S36.7 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. What is the company's cost of equity? Cost of equity 14.37 % What is the company's aftertax cost of debt? What is the company's equity weight? What is the company's weight of debt? What is the company's WACC?Explanation / Answer
Vedder Inc Share outstanding 7.7 million Curernt Share Price 62.7 Recent Dividend =D0= 3.7 Dividend growth rate =g= 8% Assume cost of Equity =k P=D(1+g)/(k-g) 62.7= 3.7*1.08/(k-0.08) 62.7 k-5.016=4 k =14.37% So Cost of Equity = 14.37% Market value of stock= 482,790,000.0 Bond 1 Bond Par Value 71.70 million Bond Market Price 64.17 million Years To maturity 22.00 years Annual Interest @7.2%= 5.16 million YTM Formula= [Annual Interest+(Par Value-Market Value)/Years to Maturity]/(Par value+Market Price*2)/3 YTM = [ 5.16+ (71.7-64.17)/22]/(71.7+64.17*2)/3 YTM =8.25% Second Bond Bond Par Value 36.70 million Bond Market Price 32.48 million Years To maturity 14.00 years Annual Interest @8.2%= 3.01 million YTM Formula= [Annual Interest+(Par Value-Market Value)/Years to Maturity]/(Par value+Market Price*2)/3 YTM =[3.01+(36.7-32.48)/14]/(36.7+32.48*2)/3 YTM =9.74 % Market Value % Value Cost Wtd Cost Bond 1 64.17 66% 8.25% 5.48% Bond 2 32.48 34% 9.74% 3.27% 96.65 8.75% So Weighted cost of debt = 8.75% Tax rate 30% Post Tax cost of Debt = 6.13% WACC Market Value Weight Post Tax cost Wtd cost Equity 482,790,000 83% 14.37% 11.97% Debt 96,651,000 17% 6.13% 1.02% Total 579,441,000.0 12.99% WACC =12.99%
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