The following information pertains to Parsons Co.: Preferred stock, cumulative:
ID: 2458523 • Letter: T
Question
The following information pertains to Parsons Co.: Preferred stock, cumulative: Par value per share $100 Dividend rate 8% Shares outstanding 10,000 Dividends in arrears none Common stock: Par value per share $10 Shares issued 120,000 Dividends paid per share $2.10 Market price per share $47 Additional paid-in capital $490,000 Unappropriated retained earnings (after closing) $290,000 Retained earnings appropriated for contingencies $280,000 Common treasury stock: Number of shares 10,000 Total cost $240,000 Net income $635,000 Compute (assume no changes in balances during the past year): (Round per share and ratios to 2 decimal places, e.g. $15.75 or 15.75%.)
Explanation / Answer
cost of preferred stock = dividend/par value = 8%
EPS = earnings available for equity shareholder / number of share outstanding
= (635000 - 240000) / 110000
= 3.59
Ke = EPS / MPS
= 3.59 / 47
= 7.64%
Cost of equity = (D1 / P0)
7.64 = 2.1 / P0
P0 = 27.49
WACC = weight of equity * Cost of equity + weight of preferred stock * Cost of preferred stock
= 7.64% * (2160000/3160000) + 8% * (1000000 / 3160000)
= 7.75%
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