You are given the following information for Twitter, Inc. Assume the company’s t

Question

You are given the following information for Twitter, Inc. Assume the company’s tax rate is 35%.
Debt:
40,000 7.5% coupon bonds outstanding, $1,000 par value, 20 years to maturity, selling for $1050; the bonds make semiannual payments.
Common stock:
750,000 shares outstanding, selling for $56 per share; the beta is 0.85.
Preferred stock:
1,400,000 shares of 5% preferred stock, currently selling for $26 per share.
Market:
7% market risk premium and 3.5% risk-free rate.
Questions:
8. What is the company's after-tax cost of debt?
Answer: __________________________________________________________ (5 point)
9. What is the company's cost of common stock?
Answer: __________________________________________________________ (5 point)
10. What is the company's cost of preferred stock?
Answer: __________________________________________________________ (5 point)
11. What is the company's WACC?
Answer: __________________________________________________________ (10 point)

Please show working.

Input Debt Settlement date Maturity date Bonds outstanding Annual coupon rate Face value ($) Coupons per year Years to maturity Bond price ($) Common stock Shares outstanding Beta Share price ($) Preferred stock Shares outstanding Coupon rate Share price ($) Market Market risk premium Risk-free rate Tax rate Calculation & Output Market value of debt Market value of equity Market value of preferred Market value of firm Market value capital structure Weight of Debt Weight of Common Stock Weight of Preferred Stock Question 8 Pretax cost of debt Aftertax cost of debt Question 9 Cost of common stock Question 10 Cost of preferred stock Question 11 WACC

Explanation / Answer

1)

Coupon payment = 0.075 * 1000 = 75 / 2 = 37.5 ( since it is a semi annual bond, we divide by 2)

Par value = 1000

Number of periods = 20 * 2 = 40 ( since it is a semi annual bond, we multiply by 2)

price of bond = 1050

Pre tax cost using a financial calculator = 7%

keys to use in a financial calculator: PV = -1050, FV = 1000, N = 40, PMT = 37.5, CPT I/Y

After tax cost of debt = 0.07 ( 1 - 0.35)

After tax cost of debt = 0.0455 or 4.55%

2)

Cost of common stock using CAPM model = risk free rate + beta ( market risk premium)

Cost of common = 0.035 + 0.85 ( 0.07)

Cost of common = 0.0945 or 9.45%

3)

Cost of preferred stock = 7%

4)

Market value of debt = 40,000 * 1050 = 42,000,000

Market value of common equity = 750,000 * 56 = 42,000,000

Market value of preferred stock = 1,400,000 * 26 = 36,400,000

Total market value of capital structure = 42,000,000 + 42,000,000 + 36,400,000 = 120,400,000

weight of debt = 42,000,000 / 120,400,000 = 0.3489

weight of common stock = 42,000,000 / 120,400,000 = 0.3489

weight of preferred stock = 36,400,000 / 120,400,000 = 0.3023

WACC = weight of common equity * cost of common equity + weight of debt * cost of debt + weight of preferred stock * cost of preferred stock

WACC = 0.3489 * 0.0945 + 0.3489 * 0.0455 + 0.3023 * 0.07

WACC = 0.032971 + 0.015875 + 0.021161

WACC = 0.07 or 7%

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