Your company has 14 million shares of common stock outstanding. The common stock

Question

Your company has 14 million shares of common stock outstanding. The common stock currently sells for $34 per share and has a beta of 1.2. The market risk premium is 10.5 percent and T-bills are yielding 2.0 percent. Use the T-bill yield for the risk-free rate.

The company has 900,000 shares of preferred stock outstanding. The preferred stock currently sells for $60 per share and pays 6 percent dividend for each $100 face value.

The company also has 210,000 (semi-annual) bonds outstanding with a 10% percent coupon interest rate and par value $1,000 each. The bonds have 15 years to maturity and sell for 91 percent of the par. The companys average tax rate is 34 percent.

Answer the following questions: PLEASE SHOW ALL WORK THANKS!!!!!!

1. What is the cost of common equity (Re) based on the CAPM?

2. What is the cost of preferred stock?

3. What is the pre-tax cost of bond?

4. What is market value of common stocks?

5. What is market value of preferred stocks?

6. What is market value of bonds?

7. What is total market value of the firm?

8. What are capital structure weights (We, Wp, and Wd)?

9. What is the weighted average-cost of capital (WACC) of the company?

Explanation / Answer

300 points is very less for so many questions with all steps and working. I have answered some of the questions, but please ask the others in a new post offering better points and I will help with the rest too. Thanks!!

1.cost of common equity (Re) based on the CAPM= 2+(1.2x10.5)= 14.6%

2.cost of preferred stock= 6/60= .1 or 10%

3. pre-tax cost of bond

910= 50PVIFA(YTM, 30)+1000PVIF(YTM,30)

YTM= pre-tax cost of bond= (5.63x2)= 11.26%

4. market value of common stocks= 14mx34= $476m or 476000000

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