2. Lee Corp. has a debt ratio of 3/5. Its 15-year 8% coupon bonds, which pay qua

Question

2. Lee Corp. has a debt ratio of 3/5. Its 15-year 8% coupon bonds, which pay quarterly coupons, are selling at 94% of its par value. Its common stock is priced at $40, and just paid a quarterly dividends per share (DPS) of $1.2. It is expected that the quarterly DPS will grow at an annualized rate of 6% indefinitely. SHOW YOUR CALCULATIONS FOR ALL NUMERICAL PROBLEMS!!! Please carry your calculation to 4 decimals! (a) Calculate the WACC for Lee Corp., assuming that the marginal tax rate is 21%. (b)Given that flotation costs for issuing new debt and new common stock capital are, respectively, 4% and 16%. Calculate (i) the weighted average flotation costs, and (ii) the NPV needed to iustify the acceptance of the project, which has an initial investment of $160 million, after taking into account of the flotation costs. Assume that only 25% of equity capital is funded by the issuance of new common stock with 75% financed by retained earnings in your analysis. (c)Calculate the current yield and capital gain yield of the discount/par/premium (circle your choice) bond issued by Lee Corp. Use your answers and the given information about the bond to discuss precisely support your choice of the bond type. THREE different features that

Explanation / Answer

debt Ratio 03:05 Assuming the face value of bond is $1000 Current selling price 1000*94% 940 Coupon Rate 8% Quarterly Rate 8/4 2 NPER (15*4) 60 Using the Rate function in excel we get yield as 2% quarterly Hence yearly yield is 8% Cost of debt = 8%(1-0.21) 0.06320 6.32% Cost of Equity = Dividend/Price + growth rate 1.2/40 + 0.06 0.03+0.06 0.09 9% a) WACC= weight of debt*cost of debt + weight of equity*cost of equity 3/5*0.0632+2/5*0.09 0.03792+0.036 0.073920 WACC=7.392%

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