Organic Produce Corporation has 9.2 million shares of common stock outstanding,

ID: 2636035 • Letter: O

Question

Organic Produce Corporation has 9.2 million shares of common stock outstanding, 670,000 shares of 7.2 percent preferred stock outstanding, and 192,000 of 8.4 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $65.70 per share and has a beta of 1.37, the preferred stock currently sells for $106.30 per share, and the bonds have 17 years to maturity and sell for 87.5 percent of par. The market risk premium is 6.9 percent, T-bills are yielding 5.6 percent, and the firm

Explanation / Answer

Answer:

Weight of capital structure

Cost of capital

Calculating cost of equity using CAPM Model:

Cost = risk free rate + beta * market risk premium

= 5.6%+13.7*6.9%

= 15.053%

Cost of preferred stock

= Annual dividend / Current price

= 7.2/106.3

= 6.773%

Cost of debt

Precost of debt = 9.937%

After tax cost of debt = 9.937%*(1-.38) = 6.161%

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

= 19.9132%*6.161 + 8.4419%*6.7732% + 71.6449%*15.053%

= 12.5834%

Number Value per share Market value (No.*Value) Weight (market value/total) Common equity 9200000 65.7 604440000 71.6449% Preferred 670000 106.3 71221000 8.4419% Debt 192000 875 168000000 19.9132% Total 843661000

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Organic Produce Corporation has 9.1 million shares of common stock outstanding,

Organic Produce Corporation has 9.2 million shares of common stock outstanding,

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Organic Produce Corporation has 9.2 million shares of common stock outstanding,

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