9,200 6.4 percent coupon bonds outstanding, with 23 years to maturity and a quot

Question

9,200 6.4 percent coupon bonds outstanding, with 23 years to maturity and a quoted price of 104.5. These bonds pay interest semiannually.

235,000 shares of common stock selling for $64.70 per share. The stock has a beta of .87 and will pay a dividend of $2.90 next year. The dividend is expected to grow by 5.2 percent per year indefinitely.

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).)

Calculate the WACC for Parrothead Enterprises. (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Explanation / Answer

Cost of Debt :

Calculating the current price of bons and multiplying it with the total number of bonds -

3.2/100 * 104.5 * [{1 - 1/(1+0.059)^23}/0.059] * 9200 = $381,930.60

Cost of Common Stock :235,000 * 64.70 = $15,204,500

Cost of Preferred Stock = 8200 * 94.2 = $772,400

Calculating WACC :

Calculating the cost of equity,ke = Rf + B(Rm-Rf) = 5.2 + 0.87(11.8 - 5.2) = 10.942%

kps = D/P(1-0.046) = 2.9/64.7(1-0.046) = 0.0469 or 4.69%

Therefore, WACC = 10.4434%

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