Organic Produce Corporation has 7;5 millions shares of common stock outstanding,

Question

Organic Produce Corporation has 7;5 millions shares of common stock outstanding, 500,000 shares of 7 percent preferred stock outstanding, and 175,000 of 82 percent of ski annual bonds outstanding, par value $1000 each. The common stock currently sells for $64 per share and has a beta of 1.2, the prefer stock currently sells for $108 per share, and the bonds have 15 years to maturity and sell for 96 percent of par. The market risk premium is 6.8 percent, T-bills are yielding 5.5 percent, and the firm's tax rate is 34 percent. What is the firm's market value capital structure? If he 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 discut the projects cash flow?

Explanation / Answer

market value capital structure:

equity capital = 64*7.5million = $480m

preferred stock = 500,000*108 = $54m

debt capital = 175,000*(.96*1000) = $168m

to discount the new project the firm should use the wacc,

re = rf + (rm - rf )*

re = 5.5% + 6.8*1.2

= 13.66%

kf = 7% (given)

kd = YTM = 8.7% = (82 + (1000-960)/15)/(.4*1000 + 0.6*960)

post tax cost od debt = kd*(1-t)

= 8.7%*(1-.34) = 5.742%

wacc = re*480/702 + kf*54/702 + kd*168/702

13.66*480/702 + 7%*54/702 + 5.472*168/702

= 11.188%

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.