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

Answer:

Cost of equity(common shares) under CAPM = Risk free rate + beta * (Market rate - Risk free rate)

= 4.50% + 0.92 * ( 13.2% - 4.50%) = 12.5%

Cost of preferred stock = Annual dividend of preferred Stock / Market price of preferred Stock * 100

= 6 / 88 *100 = 6.82 %

Cost of Bonds = Interest payment per bond* (1 - tax rate) / Market price per bond * 100

= 7.10 * (1 - .34) / 102.6 * 100 = 4.57%

Calculation of WACC:

Answer is 12.01 %.

(a) Numbers (b) Market price (c ) Market value (a) * (b) (d) Weight of Market Value ( c) / Total of (c ) ( e) Cost of stocks/bonds (f) WACC (d) * (e ) Preferred Stock 7,500 88                                     660,000                                                0.03 6.82% 0.21% Common Shares 265000 76                               20,140,000                                                0.93 12.50% 11.62% Bonds 8500 102.6                                     872,100                                                0.04 4.57% 0.18%                               21,672,100                                                      1 12.01%

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