Calculate the WACC for Martin Industries given: A tax rate of 34%, the market re

Question

Calculate the WACC for Martin Industries given: A tax rate of 34%, the market return is 13.2% and the risk-free rate is 4.5%. 7,500 preferred stock shares selling at $88/share with a 6% dividend rate. 265,000 common shares outstanding selling for $76/share. The stock has a beta of 0.92 and will pay a dividend of $2.48 next year. The dividend is expected to grow by 4% per year indefinitely. 8,500 coupon bonds outstanding with a 7.1% coupon rate and 14 years to maturity. The quoted price is 102.6. Interest is paid semiannually.

Explanation / Answer

Martin Industries All Amounts in $ Current Price of Stock, based on the current selling price of $ 76 per share P/E Ratio Current = $ 76/ $ 2.48 = 30.64516 Keeping this ratio constant for the coming years, with dividend growing at 4% per year indefinitely The latest market price per share of common stock will be 30.64516 X $ 2.48 X 104% = 79.04 $ Calculation of WACC for Martin Industries based on Capital Structure Particulars of Capital Amount Rate of Post Tax Weighted Capital Rate Amount Preferred Stock 7,500 Shares 660000 6.000% 6.000% 39600 Common Stock 265,000 Shares 20945599 8.004% 8.004% 1676486 Coupon Bonds 8,500 872100 7.100% 4.68600% 40866.61 Total 22477699 1756952 Thus, the WACC for Martin Industries works out to 7.82%

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