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Connect xC Home Chegg.com+ htmi 90% c , a search #13 Seved Help Save&Exit; Submit Check my work 3 Problem 13-7 WACC (LO1) Inc. The preferred stock currently sells for $30 per share and 20 points Examine the following book-value balance sheet for University Products pays a dividend of $3 a share. outstanding. The market risk premiums Irs, the risk-free rate is 7%, and the firm's tax rate is 40%. The common stock sells for $16 per share and has a beta of 0.9. There are 1 million common shares (Pigures in nillions Bonds, coupon-6 6, paid annually Cash and short-term securities 1.0 urity10 years, carrent yield to aturity7)-0 stock (par val Aecounts receivable Plant and equipeent Total Common stock (par value 50.20) 21.Bedatapaiga stocekhoiders equity 32. Total $32.0 a. What is the market debt-to-value ratio of the firm? (Do not round intermediate calculations. Enter your answer as a percent Referencesrounded to 2 decimal places.) debt rato b. What is University's WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)Explanation / Answer
a.
Book value of preferred stock = $3 million = $3,000,000
Preferred stock par value = $10 per share
Number of preferred stock shares = $3,000,000/$10 = 300,000 shares
Market value of preferred stock = Price per share*Number of shares = $30 * 300,000 = $9,000,000
Market value of common stock = $16 per share * 1 million shares = $16,000,000
Market value of debt = Present value of coupon payments + Present value of face value of bond
Annual coupon payment of bond = $5 million * 6% = $300,000
Maturity of bond = 10 years
Yield to maturity = 7%
Present value of annuity = Annuity amount*{1-(1+r)-n}/r
Present value of annual coupon payments = $300,000*(1-1.07-10)/0.07 = $2,107,074.46
Present value of face value of bond = $5,000,000/1.0710 = $2,541,746.46
Market value of debt = $2,10,074.46 + $2,541,746.46 = $4,648,820.92
Total market value = $9,000,000 + $16,000,000 + $4,648,820.92 = $29,648,820.92
Market debt to value ratio = Market value of debt/Total market value = $29,648,820.92 / $4,648,820.92 = 0.1568 = 15.68%
b.
Yield to maturity of bond = 7%
Tax rate = 40%
After tax cost of debt = Yield to maturity*(1-Tax rate) = 7%*(1-0.40) = 4.2%
Cost of preferred stock = Annual dividend/Price per share = $3/$30 = 0.10 = 10%
Cost of common stock = Risk free rate + (Beta*Market risk premium) = 7% + (0.9*11%) = 16.90%
Weight of debt = 15.68%
Weight of preferred stock = Market value of preferred stock/Total market value = $9,000,000/$29,648,820.92 = 30.36%
Weight of common stock = Market value of common stock/Total market value = $16,000,000/$29,648,820.92 = 53.97%
WACC = (Weight of debt*Cost of debt)+(Weight of preferred stock*Cost of preferred stock)+(Weight of common stock*Cost of common stock)
WACC = (0.1568*4.2%)+(0.3036*10%)+(0.5397*16.9%) = 0.1281 = 12.81%
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