A firm has a Capital Structure as follows: 1. The market value of the bonds is $

Question

A firm has a Capital Structure as follows:

1.      The market value of the bonds is $2,000,000,

2.      The market value of the Preferred Stock is $1,000,000.

3.      Firm has 500,000 shares of common stock (equity) outstanding, selling for $20 per share

The preferred stock share price is $50 and which a $4 dividend. Each share of common stock sells for $20 and pays a $1.00 dividend, which is expected to grow by 2% per year. The price of the bonds is $818, and the coupon rate is 5%. The bonds will mature in 10 years.

The firm’s tax rate is 40%. The company has $2,500,000 in sales, and expenses of $1,000,000. The initial investment of $5,000,000 will be depreciated straight-line over 10 years. The project is expected to last 10 years.

1.      What is the firm’s WACC? ________________________________Chapter 13 ( to solve this question you must use the cost of preferred stock, cost of the common stock and cost of the bonds from Mini case 2-part 1)

Explanation / Answer

WACC =6.79%

Cost of Capital Prefered Stock Dividend/Price=4/50 8.00% Equity D1/P +G =((1*(1+.02))/20)+2% 7.100% Debt YTM NPER =10 PMT =50 PV=-818 Fv =1000 YTM=7.67%*(1-.40)=4.60%

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