Organic Produce Corporation has 9.2 million shares of common stock outstanding,
ID: 2646933 • 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
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 of Common Stock = 9.2Milion * 65.70 = $ 604.44 Million
Market value of Preferred Stock = 0.67 Miillion * 106.30 = $ 71.221 Million
Market Value of Bond = 0.192 Million * 875 = $ 168 Million
Total Market Value = $843.661 Million
Market value Weight of Common Stock = 604.44/843.661 = 0.7165
Market value Weight of Preferred Stock = 71.221/843.661 = 0.0844
Market value Weight of Debt = 168/843.661 = 0.1991
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).)
1) Cost of equity = Rf + (Rm-Rf)*Beta
Cost of equity = 5.6 + 6.9*1.37
Cost of equity = 15.05%
2) Cost of Preferred Stock = 72/106.30
Cost of Preferred Stock = 6.77%
3) Before Tax Cost of Debt = rate(nper,pmt,pv,fv) *2
Before Tax Cost of Debt = rate(34,42,-875,1000) * 2
Before Tax Cost of Debt = 9.94 %
After Tax Cost of Debt = 9.94*(1-38%)
After Tax Cost of Debt = 6.16%
Answer
If the firm is evaluating a new investment project that has the same risk as the firm
Market value weight of debt 0.1991 Market value weight of preferred stock 0.0844 Market value weight of equity 0.7165Related Questions
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