Organic Produce Corporation has 9.4 million shares of common stock outstanding,

Question

Organic Produce Corporation has 9.4 million shares of common stock outstanding, 690,000 shares of 7.4 percent preferred stock outstanding, and 194,000 of 8.6 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $65.90 per share and has a beta of 1.39, the preferred stock currently sells for $106.10 per share, and the bonds have 13 years to maturity and sell for 86.5 percent of par. The market risk premium is 7 percent, T-bills are yielding 5.7 percent, and the firm's tax rate is 35 percent. Required: What is the firm's market value capital structure? (Do not round intermediate calculations. Round your answers to 4 decimal places (e.g., 32.1616).) Market value weight of debt Market value weight of preferred stock Market value weight of equity What is the firm's cost of each form of financing? (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).) After tax cost of debt % Cost of preferred stock % Cost of equity % If the firm is evaluating a new investment project that has the same risk as the firm's typical project, what rate should the firm use to discount the project's cash flows? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Weighted average cost of capital %

Explanation / Answer

Value of equity= 9.4mx65.90= $619460000

Value of debt= 194000x865= $167810000

Value of prefered stock= 690000x106.1= $73209000

Total value= 619460000+167810000+732090000= $860479000

Weight of debt=167810000/860479000= .1950

Weight of preferred stock= 73209000/860479000= .0851

Weight of equity= 619460000/860479000= .7199

Debt:

865= 43PVIFA(Kd,26)+1000PVIF(Kd,26)

Kd= (2x5.26)= 10.52

After tax cost of debt= 10.52x(1-.35)= 6.84%

cost of Prefered stock= 7.4/106.10= 6.97%

cost of Equity= 5.7+(1.39x7)= 15.43%

WACC= (.1950x6.84)+(.0851x6.97)+(.7199x15.43)= 13.04%

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