NestEgg Co. has the following information: -Expected Long-term Growth rate = 5%,

Question

NestEgg Co. has the following information: -Expected Long-term Growth rate = 5%, Last Dividend (Common Stock) = $3.81/share -A current price of common stock of $30/share, with 1.6M shares outstanding -A preferred dividend of $4 with a current price of preferred stock of $50, and 40k shares outstanding -19,200 outstanding bonds with 10 years to maturity, paying a 6% coupon, and a yield to maturity of 5.67% and 30,000 outstanding bonds with 5 years to maturity, paying a 4.8% coupon, and a price of $1000. (Par value is $1000 for both bonds) (Round debt value to nearest 100k, i.e. 66.7M) -NestEgg’s Tax Rate is 30% Find the WACC for NestEgg Co. (Round to the nearest 100th of a %, i.e. 8.79%)

Explanation / Answer

Answer:

Ke=D1/Po+g

=($3.81*(1+5%)/$30)+5%

=18.34%

Cost of Preferred shares=$4/$50=8%

Bonds 1=60*PVIFA(5.67%,10)+$1000*PVIF(5.67%,10)

=$1024.67

KD after tax=5.67%(1-0.30)=3.969%

Bonds 2=48*PVIFA(4.8%,5)+$1000*PVIF(4.8%,5)

=$1000

KD after tax=4.8%(1-0.30)=3.36%

Capital structure Market value Weight Cost of capital WACC Common stock 48000000 0.481572 18.34% 8.83% Preferred shares 2000000 0.020065 8% 0.16% Bonds 19673664 0.197381 3.97% 0.78% Bonds 2 30000000 0.300982 3.36% 1.01% Total 99673664 1 10.79%

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