L. None of the above is a correct answer. ng-10gah stbekhoiders receive C- 32) V
ID: 2801944 • Letter: L
Question
L. None of the above is a correct answer. ng-10gah stbekhoiders receive C- 32) Verizon has a market value based capital structure of 40% debt and 60%, common equity 30- Verizon has year semi-annual coupon bonds outstanding selling at 108% of their S1000 par value with an annual coupon rate of690 Verizon's current stock price is $50 its last annual dividend of S2.50. Financial analysts expects Verizon's dividend to grow at a4% constant growth rate. The company's marginal tax rate is 40% What is Verizon's WACC based on this information? 5.4 90 C. 6.8% D. 7.4% E. 7.6%Explanation / Answer
Dividend, D =$2.5
Growth Rate, g = 4% = 0.04
Market Price of Share, P = $50
Return on Equity, Ke = (D(1+g)/P)+g
= (2.5(1+0.04)/50)+0.04
= 0.092
= 9.2%
Market price of bond = $1000*108% = $1080
Interest = $1000*6%/2 = $30
Cost of Debt be x
then market Price = Present Value of Interest + Present Value redemption value
$1080 = ($30 * PVAF(x, 60)) + ($1000 * PVAF (x, 60))
If x=6%, Market Value = $1000
If x=5%, Market Value = $1154.54
For 1% decrease in x, Market Value increases by $154.54(1154.54-1000), for how much decrease in x, Market Value increases by $80(1080-1000).
Answer is 0.51766 (80/154.54)
Cost of debt = 6-0.51766 = 5.48%
Cost of debt after tax = 5.48 (1-0.4) = 3.288%
WACC:
Correct Option is C) 6.8%
Type of capital Cost of Capital Weight Weighted Cost Debt 3.288 40% 1.3152 Equity 9.2 60% 5.52 6.8352Related Questions
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