1.0OMG Inc. has 4 million shares of common stock outstanding, 3 million shares o
ID: 2776804 • Letter: 1
Question
1.0OMG Inc. has 4 million shares of common stock outstanding, 3 million shares of preferred stock outstanding, and 5,000 bonds. If the common shares are selling for $19 per share, the preferred shares are selling for $23 per share, and the bonds are selling for 104 percent of par, what would be the weight used for equity, debt and preferred stock in the computation of OMG's WACC?
2.TAFKAP Industries has 3 million shares of stock outstanding selling at $17 per share and an issue of $20 million in 7.50 percent, annual coupon bonds with a maturity of 15 years, selling at 106 percent of par. If TAFKAP's weighted average tax rate is 34 percent and its cost of equity is 14.50 percent, what is TAFKAP's WACC?
Explanation / Answer
Part -1
Total Equity = 4000000*19 =76 Million
Total Preferred Capital = 3000000*23 =69 Milliom
Total Debt = 5000*1000 (par value or book value) = 5 Million
Total capital = 150 Million
Weight of Equity = 76/150 = 50.67%
Weight of Preference = 69/150=46%
Weight of Debt = 5/150= 3.33%
Part-2
Total equity = 3 Million * 17 =51 Million
Total debt = 20 Million
Total Capital = 71 Milliom
Weight of Equity = 0.7183
Weight of Debt= 0.2817
Cost of Equity = 14.5%
Cost of debt = rate (15,75,-1060,1000) = 6.85%*(1-Tax Rate) = 6.85%(1-0.34) =4.52%
Hence Weighted Average Cost of Capital (WACC) is
0.7183* 14.5% + 0.2817 * 4.52% = 11.69%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.