The following information is available concerning a firm\'s capital: DEBT: 5000
ID: 2688915 • Letter: T
Question
The following information is available concerning a firm's capital: DEBT: 5000 bonds with a face value of $1000 and an initial 20 year term were issued five years ago with a present coupon rate of 8%. Today these bonds are selling for $846.30 PREFERRED STOCK: 20,000 shares of preferred stock paying an annual dividend of $9.50 are outstanding. The shares currently trade at $79.16 COMMON EQUITY: 200,000 shares of common stock are outstanding which are now selling for $22.50 per share. An annual dividend of $1.70 was just paid and is expected to grow indefinitely at 6%. TARGET CAPITAL STRUCTURE: The firm's target capital structure is of 30% debt, 20% preferred stock, and 50% equity. THE FIRM CAN ISSUE ANY TYPE OF SECURITY WITHOUT PAYING FLOTATION COSTS. THE COMBINED FEDERAL AND STATE TAX RATE IS 40%. CALCULATE THE FIRM'S WACC BASED ON MARKET VALUE BASED CAPITAL STRUCTURE AND MARKET RETURNS.Explanation / Answer
The following information pertains to the capital structure of a firm:
Debt: Bonds with a face value of $1000 and a 20-year term were issued five years ago with a coupon rate of 8%. Today these bonds are selling for $846.30.
Preferred stock: Preferred stock is paying an annual dividend of $9.50 and is currently trading at $79.16.
Common equity: The current market price of common stock is $22.50 per share. The annual dividend just paid was $1.70 per share, and the dividend is expected to grow indefinitely at a constant rate of 6%.
Target capital structure: The firm has agreed that its optimal capital structure should consist of 30% debt, 20% preferred stock, and 50% equity.
If the combined federal and state corporate tax rate is 40%, what would be the firm's approximate WACC in light of its target capital structure?
a. 9.4%
b. 11.2% answer
c. 8.2%
d. 12.4%
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