A company\'s Balance Sheet (in millions) Assets Current Net Fixed Liabilities &
ID: 2658341 • Letter: A
Question
A company's Balance Sheet (in millions) Assets Current Net Fixed Liabilities & Equity $120 $180 Bonds ($1000 Par) Preferred stocks ($100 Par) 50 Common Stock ($1 par) 20 Total 130 Total $200 $200 The company's bonds have 9 years to mature, pay 10% coupon rate semi-annually and comparable bonds, YTM is 11% The company's applicable tax rate is 40%. The market price of common stock is $12.50 per share. The common stock dividend has grown at a steady rate from $0.68 in December 2000 to $1.48 in December 2010. The same growth rate is expected to continue for long time in the future. The floatation cost for new common stocks is 15%. The market value of the preferred stock is $75 and it pays quarterly dividend of $1.75 The floatation cost on issuing new preferred stock is 796 Next year is 2011 What is the WACC of the company using the market weights of capital structure (Assuming the company will issue new preferred and common stocks)?Explanation / Answer
Market Price of bond
Using present value in MS Excel
pv(rate,nper,pmt,fv,type)
PV(5.5%,18,50,1000,0)
($943.77)
cost of bond
11%
after tax cost of bond
YTM*(1-tax rate)
11*(1-.4)
6.60%
cost of preferred stock
preferred stock/(market price- flotation cost)
10.04%
preferred dividend
(1.75*4)
7
net proceeds from preferred stock
75*(1-.07)
69.75
cost of common stock
(expected dividend)/ net proceeds)+ growth rate
(1.741/10.625)+17.65%
34.04%
growth rate
(1.48/.68)-1
1.176471
17.65%
expected dividend
1.48*(1.1764)
1.741072
net proceeds
12.50*(1-.15)
10.625
WACC
market value = no of security*market price
weight = individual value/total
cost
weight*cost
debt
122690100
0.299105
6.6
1.974096
preferred stock
37500000
0.091421
10.04
0.917867
common stock
250000000
0.609474
34.04
20.74648
total
410190100
WACC = sum of Weight*cost
23.64
Market Price of bond
Using present value in MS Excel
pv(rate,nper,pmt,fv,type)
PV(5.5%,18,50,1000,0)
($943.77)
cost of bond
11%
after tax cost of bond
YTM*(1-tax rate)
11*(1-.4)
6.60%
cost of preferred stock
preferred stock/(market price- flotation cost)
10.04%
preferred dividend
(1.75*4)
7
net proceeds from preferred stock
75*(1-.07)
69.75
cost of common stock
(expected dividend)/ net proceeds)+ growth rate
(1.741/10.625)+17.65%
34.04%
growth rate
(1.48/.68)-1
1.176471
17.65%
expected dividend
1.48*(1.1764)
1.741072
net proceeds
12.50*(1-.15)
10.625
WACC
market value = no of security*market price
weight = individual value/total
cost
weight*cost
debt
122690100
0.299105
6.6
1.974096
preferred stock
37500000
0.091421
10.04
0.917867
common stock
250000000
0.609474
34.04
20.74648
total
410190100
WACC = sum of Weight*cost
23.64
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