You are given the following information concerning Parrothead Enterprises: 10,50

ID: 2785516 • Letter: Y

Question

You are given the following information concerning Parrothead Enterprises: 10,500 7 percent coupon bonds outstanding, with 25 years to maturity and a quoted price of 107.75. These bonds pay interest semiannually. Common stock: 300,000 shares of common stock selling for $66.00 per share. The stock has a beta of 1.01 and will pay a dividend of $4.20 next year. The dividend is expected to grow by 5 percent per year indefinitely. Preferred stock: 9,500 shares of 4.5 percent preferred stock selling at $95.50 per share. Market A 10.5 percent expected return, a risk-free rate of 5 percent, and a 35 percent tax rate Required: What is the firm's cost of each form of financing? (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).) Aftertax cost of debt A.11 % Cost of equity Calculate the WACC for Parrothead Enterprises. (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (eg., 32.16)) WACC

Explanation / Answer

PV= 107.75

Period = 25*2 = 50 semiannual periods

Coupon = 7%*100/2 = 3.5

FV =100

Hence Yield is computed using the excel RATE function as =RATE(50,3.5,-107.75,100)

= 3.19%

Annual cost of debt = 3.19%*2 = 6.38%

Cost of debt after tax = 6.38%*(1-35%) = 4.14%

= 4.20/66 + 5

= 11.36%

Capital

Cost

Amount

Weight

Weighted cost

Equity=300000*66

11.36%

19800000

0.910041

0.103381

Preference=9500*95.5

4.71%

907250

0.041699

0.001964

Debt=10500*100

4.14%

1050000

0.04826

0.001998

TOTAL

21757250

0.107343