Organic Produce Corporation has 8.2 million shares of common stock outstanding,

Question

Organic Produce Corporation has 8.2 million shares of common stock outstanding, 570,000 shares of 7.2 percent preferred stock outstanding, and 182,000 of 8.4 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $64.70 per share and has a beta of 1.27, the preferred stock currently sells for $107.30 per share, and the bonds have 17 years to maturity and sell for 92.5 percent of par. The market risk premium is 6.9 percent, T-bills are yielding 5.6 percent, and the firm

Organic Produce Corporation has 8.2 million shares of common stock outstanding, 570,000 shares of 7.2 percent preferred stock outstanding, and 182,000 of 8.4 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $64.70 per share and has a beta of 1.27, the preferred stock currently sells for $107.30 per share, and the bonds have 17 years to maturity and sell for 92.5 percent of par. The market risk premium is 6.9 percent, T-bills are yielding 5.6 percent, and the firm

Explanation / Answer

market value of debt

= 925 * 182000 = 168350000

market value of preferred stock = 570000 * 107.30 = 61161000

market value of equity = 8200000 * 64.70 = 530540000

total value = 760051000

market value weight of debt = (168350/760051) = 0.2215

market value weight of preferred stock = (61161/760051)
= 0.0805

market value weight of equity = 0.6980

cost of equity = 5.6% + 1.27 * 6.9% = 14.363%

cost of preferredstock = 7.2/107.30 = 6.71%

925 = 42 * PVIFA(r%,34) + 1000 * PVIF(r%,34)

r = 4.64%

after tax cost of debt = 2 * 4.64 * (1-0.38) = 5.7536%

WACC = 0.2215 * 5.7536% + 0.0805 * 6.71% + 0.6980 * 14.363%

= 11.84%

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