Great Corporation has the following capital situation. Debt: One thousand bonds

Question

Great Corporation has the following capital situation. Debt: One thousand bonds were issued five years ago at a coupon rate of 10%. They had 25-year terms and $1,000 face values. They are now selling to yield 9%. The tax rate is 40% Preferred stock: Two thousand shares of preferred are outstanding, each of which pays an annual dividend of $7.50. They originally sold to yield 15% of their $50 face value. They're now selling to yield 10%. Equity: Great Corp has 120,000 shares of common stock outstanding, currently selling at $14.48 per share. The risk free rate is 3%, market rate of return is 10% and the Beta is 1.2.

Explanation / Answer

WACC =9.13%

Value Of Debt Pb = PMT[PVFA4.5%,40] + FV[PVF4.5%,40] =50*18.4016+1000*0.17192 =1092 Because there are 1,000 bonds outstanding, the market value of the firm's debt is $1092*1000 =1,092,000 Value of Preferred stock 7.50/.10 =75 the total market value of preferred stock =75*2000 =150,000 Equity 14.48*120000 Shares =1,737,600

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