vie/ket. market k pleum and3.1 pern Sk percent free rate. Finding the WACC. Hank

Question

vie/ket. market k pleum and3.1 pern Sk percent free rate. Finding the WACC. Hankins Corporation has 5.4 million shares of common stock outstanding, 290,000 shares of 5.6 percent preferred stock outstanding, and 125,000 of 6.7 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $64 per share and has a beta of 1.13, the preferred stock currently sells for $103 per share, and the bonds have 20 years to maturity and sell for 109 percent of par. The market risk premium is 6.8 percent, T-bills are yielding 4.3 percent, and the firm's tax rate is 34 percent LO 3 What is the firm's market value capital structure? If the firm is evaluating a new investment project that has the same risk as the firm's typical project, what rate should the firm use to discount the project's cash flows? a. LO 4 SML and WACc. An all-equity firm is considering the following projects:

Explanation / Answer

a)

Market Value Capital Structure

Market Value of Debt = Price of bond * Number of bonds outstanding

Price of Bond = 109% * 1000 = $1090

Market Value of debt = 1090 * 125000 = $ 136,250,000= $ 136.25 M

Market Value of Equity = 64 * 5.4 M = $ 345.6 M

Market Value of preferred equity = 103*293000 = 30,179,000= $ 30.179 M

Total Capital Structure = 136.25 + 345.6 + 30.179 = $ 512.03 M

b)

WACC of the project = Kd* Wd * (1-t) + Ke * We + Kp * Wp

Kd = Cost of debt = rate(nper,pmt,pv,fv) = rate(20*2, 6.7%/2*1000,-1090,1000) = 2.96% = 5.93% pa

Wd = 136.25/512.03 = 0.266, 1-t = 0.66

Ke = Cost of Equity = Rf + Beta * MRP = 4.3%+1.13*6.8% = 11.984%

We = 345.6/512.03 = 0.674

Kp = 5.6%, Wp= 0.0589

WACC= 5.93% * 0.266*0.66 + 11.984%*0.674 + 5.6% * 0.0589 = 9.448 %

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